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Surendra Kumar Dhawan And Anr. v. R. Vir And Ors.
Factual and Procedural Background
This opinion arises from an application instituted by the respondents seeking a stay of proceedings on the basis of an arbitration clause contained in the articles of association of M/s. Kare Private Limited. The applicant had earlier adjourned judgment to consider proposals for settlement, but a full settlement was not finalized due to the time required for fulfillment. The present interim order is passed in connection with an application under Section 403 of the Companies Act, 1956.
Legal Issues Presented
- Whether the arbitration clause in the articles of association can oust the jurisdiction of the court in proceedings under Sections 397 and 398 of the Companies Act, 1956.
- Whether statutory rights under Sections 397, 398, and 433 of the Companies Act, 1956 can be overridden or stayed by an arbitration clause contained in the company's articles.
Arguments of the Parties
Respondents' Arguments
- The respondents contended that the arbitration clause in the articles of association is binding on the members and should result in a stay of the court proceedings.
Court's Observations on Arguments
- The court noted that although the respondents urged the binding nature of articles on members, such articles cannot override statutory provisions.
- The court found it unnecessary to consider other submissions or case law cited by respondents as they addressed different situations.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The court examined the arbitration clause (Article No. 38) which mandates arbitration for disputes between the company, directors, members, or others. However, the court emphasized that the jurisdiction conferred by Sections 397 and 398 of the Companies Act, 1956, relating to company management disputes and Section 433 concerning winding up, is statutory and cannot be ousted by an arbitration clause.
Section 9 of the Companies Act, 1956 was pivotal in the court's analysis. It provides that the Act overrides any contrary provision in the memorandum, articles, agreements, or resolutions of the company. Specifically, sub-clause (b) declares void any provision repugnant to the Act. Therefore, even if the articles attempt to oust court jurisdiction, such provisions are ineffective.
The court also noted the statutory rights of members to file petitions under Sections 397, 398, and 433 cannot be taken away by articles or arbitration clauses. This statutory protection was deemed paramount and not subject to arbitration agreements within the articles.
Due to the novelty of the question, the court declined to stay the petition and did not make any order as to costs.
Holding and Implications
The court held that the arbitration clause in the articles of association cannot oust the statutory jurisdiction of the court under Sections 397, 398, and 433 of the Companies Act, 1956.
The direct consequence is that the petition under these statutory provisions cannot be stayed on the ground of an arbitration clause in the articles. The court declined to stay the petition and did not impose costs. No new precedent was established beyond reaffirming the primacy of statutory provisions over company articles in this context.
JUDGMENT
D.K. Kapur, J.
1. Although I had heard arguments in this matter some time ago, I had adjourned the application without delivering judgment in view of the proposals made during the course of hearing concerning the settlement of the case. Unfortunately, a full settlement in the main petition has not been finalised between the parties on account of the fact that the settlement arrived at requires a considerable period for fulfillment. The settlement arrived at is fully stated in the order which is being passed today in C.A. No. 650 of 1972, which is an application under Section 403 of the Companies Act, 1956, for interim order. I am passing interim order.
2. This application was instituted by the respondents for stay of the proceedings on account of the fact that there was an arbitration clause in the articles of the company. I am of the view that the articles cannot debar the court's jurisdiction in the matter of a petition under sections 397 and 398 of the Companies Act, 1956.
3. The article in question is No. 38 in the articles of M/s. Kare Private Limited, which runs as follows :
" In case any difference shall arise between the company and the directors or between the directors themselves or between any members of the company or between the company and any person to whom these presents shall apply the same shall be referred to arbitration and if the parties cannot agree upon a single arbitrator there shall be two arbitrators who shall have power to choose an umpire and in either case such reference shall be so arranged and conducted in all other respects as to conform to the provision in that behalf contained in the Arbitration Act, 1940, or any Act in force for the time being in the Republic of India."
4. This article shows that if there is a difference between the company and its directors or between the directors themselves or between any members of the company or between the company and any person, then the same will be referred to arbitration. The jurisdiction of the court under sections 397 and 398 of the Companies Act, 1956, or under Section 433 is concerned with the management of the company in the special circumstances provided in sections 397 and 398 or for winding up when the situation provided in Section 433 arises. This is a statutory jurisdiction which cannot be ousted by arbitration clause.
5. Although the learned counsel for the respondents has urged that the articles are binding on the members of a company, the said articles cannot override the operation of the Act. It is only necessary to mention the provisions of Section 9 of the Companies Act, 1956, which states as follows:
"9. Act to override memorandum, articles, etc.--Save as otherwise expressly provided in the Act-
(a) the provisions of this Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a company, or in any agreement executed by it, or in any resolution passed by the company in general meeting or by its board of directors, whether the same be registered, executed or passed, as the case may be, before or after the commencement of this Act; and
(b) any provision contained in the memorandum, articles, agreement or resolution aforesaid shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be." This section shows that even if the articles operate to oust the jurisdiction of court, they cannot effectively do so, and in fact, the Act is effective and operative even if anything contrary to the same is contained in the article. Sub-clause (b) reproduced above shows that the article if repugnant to the provisions of the Act will be void. I think this is sufficient to decide this application under Section 34 of the Arbitration Act, 1940.
6. The member of a company has a right to file a winding-up petition under Section 433 of the Companies Act, 1956, in certain circumstances. That statutory right cannot be ousted by articles or any provisions of the same. Similarly, the shareholders of a company have a right to file a petition under Section 397 or Section 398 of the Act if the provisions of Section 399 are satisfied. This right is a statutory right, which cannot be ousted by a provision of the article. I have, Therefore, found it unnecessary to deal with any of the submissions made on behalf of the respondents-applicants or the case-law cited by him. There is no case in which the question now raised before the court has been urged as a ground for staying a winding-up petition or a petition under Section 397 or 398 of the Companies Act, 1956. All the cases cited deal with completely different situations. Needless to say, the provisions of Section 9 of the Companies Act, 1956, reproduced above are a complete answer to the case of the respondents. I, Therefore, decline to stay the petition. As this question is a novel one, I do not make any order as to costs.
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