The instant application (C.A. No. 366/2011) under section 8 of the Arbitration and Conciliation Act, 1996 (for brevity ‘Arbitration Act’) has been filed by Respondent No. 2 in a pending company Petition (C.P. No. 46(ND)/2011) which has been preferred under sections 397 & 398 of the Companies Act, 1956 (for brevity the ‘Companies Act’). The applicant-Respondent No. 2 has prayed that the dispute raised in company petition is referable to arbitration in terms of clause 7 of the Memorandum of Understanding (for brevity ‘MOU’) dated 18.03.2009. The aforesaid MOU has been placed on record of the company petition (PS). The applicant - Respondent No. 2 has pleaded that non applicant - petitioner has built up his case of ‘oppression and mismanagement’ on the basic ground of non-implementation of the MOU dated 18.03.2009 and two addendums attached with it dated 13.03.2010 and 26.03.2010. A reference has been invited to the averments made in the petition by urging that even the foundation of the reliefs sought are the MOU dated 18.03.2009 and the aforesaid two addendums. According to the MOU there is mandatory provision for referring the dispute between the parties for adjudication by way of arbitration. It has been asserted that the prayers for relief seek to give colour of oppression and mismanagement which in fact are the prayer for implementation of the agreement of the parties executed in the form of MOU and the addendums.
2. The application has been vehemently opposed by taking a preliminary objection that the MOU dated 18.03.2009 has been signed by non applicant-petitioner, applicant-Respondent No. 2 and one Mr. Navdeep Kumar Sharma (Respondent No. 4). The addendum dated 13.03.2010 has been signed by three parties mentioned above and in addition by Respondent No. 1-company. However the second addendum dated 26.03.2010 has only been signed by the petitioner and Respondent No. 2. On the aforesaid basis it has been urged that the petition clearly sets out a case of ‘oppression and mismanagement’ of Respondent No. 1-company against applicant-Respondent No. 2 and there is statutory duty cast on this Tribunal to enter adjudication upon cases of ‘oppression and mismanagement’. It has been insisted that the relief sought by the petitioner in the instant petition is outside the scope of arbitration instituted on the basis of MOU and/or the two addendums. It has also been averred that if some part of the prayer emerges from the allegation of oppression and mismanagement then there is no possibility of severing the causes by refereeing some to the arbitration and by retaining the other for adjudication by the Tribunal. It has also been pleaded that neither the MOU nor the addendums have been incorporated in the Articles of Association of Respondent No. 1-company. The petitioner has denied the allegation that it is on account of non implementation of the MOU and the addendums appended thereto that the company petition has been filed. The petitioner has also denied all other allegations.
3. Learned counsel for the applicant — Respondent No. 2 has vehemently argued that a glance on the prayer made in the petition and the averments made therein would not leave an iota of doubt that the grievance raised in the petition is based on non implementation of the MOU dated 18.2.2009 and the addendums dated 13.03.2010 and 26.03.2010. Learned counsel has drawn our attention to the averments made in paras 8, 9, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 30, 32 and various reliefs claimed in paras 55 and 56 of the company petition. According to the learned counsel the case is fully covered by the Judgment of Delhi High court in 20TH Century Finance Corporation Ltd. v. Union of India, (2011) 161 Comp Cas 247 (Delhi). Learned counsel has emphasised that it is a completely dressed up petition in order to defeat the pending proceedings before the Arbitrator.
4. Learned counsel for the non applicant-petitioner has however submitted that this Tribunal is clothed with wide powers which are aimed at correctional mechanism to rescue an ailing company by preventing the oppression and mismanagement. According to the learned counsel this is not a ‘dressed up’ petition and it is not within the domain of the Arbitrator to grant relief in respect of ‘oppression and mismanagement’. He has argued that the same facts may give rise to claim for relief in a properly filed petition under sections 397 and 398 as the petitioner may also invoke arbitration which result in payment of damages which may emerge out of the breach committed by the respondents. Learned counsel has placed reliance on a judgment of Bombay High Court rendered in the case of Rakesh Malhotra v. Rajinder Kumar Malhotra, (2015) 192 Comp Cas 516 (Bom).
5. Having heard the learned for the parties at a considerable length we are of the view that the question which arises for determination in this case is “whether in the facts and circumstances of this case the dispute raised in the company petition filed u/s. 397, 398, 402 and 403 of the Companies Act could be referred to arbitration on the basis of identical reliefs having been claimed”. The law on the subject is fairly well settled. In the case of Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya, (2003) 5 SSC 531 Hon'ble the Supreme Court has, inter alia observed as under:—
13. Secondly, there is no provision in the Act that when the subject-matter of the suit includes subject-matter of the arbitration agreement as well as other disputes, the matter is required to be referred to arbitration. There is also no provision for splitting the cause or parties and referring the subject-matter of the suit to the arbitrators.
15. The relevant language used in Section 8 is: “in a matter which is the subject of an arbitration agreement”. The court is required to refer the parties to arbitration. Therefore, the suit should be in respect of “a matter” which the parties have agreed to refer and which comes within the ambit of arbitration agreement. Where, however, a suit is commenced “as to a matter” which lies outside the arbitration agreement and is also between some of the parties who are not parties to the arbitration agreement, there is no question of application of Section 8. The words “a matter” indicate that the entire subject-matter of the suit should be subject to arbitration agreement.
(Emphasis added)
16. The next question which requires consideration is even if there is no provision for partly referring the dispute to arbitration, whether such a course is possible under Section 8 of the Act. In our view, it would be difficult to give an interpretation to Section 8 under which bifurcation of the cause of action, that is to say, the subject-matter of the suit or in some cases bifurcation of the suit between parties who are parties to the arbitration agreement and others is possible. This would be laying down a totally new procedure not contemplated under the Act. If bifurcation of the subject-matter of a suit was contemplated, the legislature would have used appropriate language to permit such a course. Since there is no such indication in the language, it follows that bifurcation of the subject-matter of an action brought before a judicial authority is not allowed.”
6. The aforesaid observations of Hon'ble Supreme Court have been followed and applied in the case of Rakesh Malhotra (supra). In this case Hon'ble Bombay High Court has held that a petition which is merely ‘dressed up’ and seeks, in the guise of an ‘oppression and mismanagement’ petition, to oust an arbitration clause, or a petition that is itself vexatious, oppressive, mala fide (or, at any rate, not bona fide) cannot be permitted to succeed. In assessing an allegation of ‘dressing up’ the petition filed u/s. 397/398 must be read as a whole, including its grounds and the reliefs sought. If the relief claims are not arbitrable because they are covered by the section 402 of the Companies Act, 1956, then there is no question of a dismissal of the petition on the ground of existence of the arbitration clause. The aforesaid view has also been expressed by Hon'ble Delhi High Court in 20TH Century Finance Corporation Ltd. (supra).
7. We have to thus closely examine the averments made in various paras of the petition along with ground and reliefs. The facts have been narrated in paras 6 to 51. A perusal of the averments made in para 7 would show that it opens with the general allegations of acts of oppression and mismanagement and then goes on to allege that applicant-Respondent No. 2 is holding the company to ransom after having agreed to sell his 47.8% of its equity shares to the petitioner. There are no specific allegation of oppression except general remarks that the acts of Respondent No. 2 have severely prejudiced the interest of the company. The reference to agreement to sell obviously is to the MOU and the two addendums. In para 8 the date of incorporation and the objects of the company have been given. In para 9, 10 & 11 the shareholding pattern of all the three shareholders have been given with further allegations that Respondent No. 1 company was incorporated after the dissolution of the partnership between the petitioner and Respondent No. 2. In para 12 & 13 the business of making medicines and pharmaceutical products by the company have been mentioned along with the facts that manufacturing units was set up.
8. Then Part 4 under the heading ‘oppression by Respondent No. 2’ deals with MOU dated 18.3.2009 and the two addenda in various paras. In para 15 it is conceded that in the interest of Respondent No. 1-company it was decided that respondent No. 2 would exit on the agreed terms and manufacturing unit will continue with the Respondent No. 1-company and MOU dated 18.3.2009 was executed and Respondent No. 1-company continued to own the manufacturing unit. The following conditions were provided:—
(a) 50% of the value of the factory shall be payable by the petitioner to the Respondent No. 2 in five years on a half yearly basis. The Petitioner agreed to issue 2% convertible, redeemable preference share of D.R. John's Lab Pharma Private Limited on half yearly basis equivalent to the amount payable to the Respondent No. 2 in respect of 50% of the value of the factory.
(b) It was agreed that all fixed assets other than the manufacturing unit, in the form of financial equipments, electronics items or any other items invested for sale promotion having book value shall be divided as per exclusive territories division.
(c) The petitioner and the Respondent No. 1 agreed to sell and market the brands which were manufactured by the company as well as the brands which were outsourced or manufactured by the third parties marketed by the Respondent No. 1, in the respective territories as divided in Clause 2 of the Agreement.
(d) All respective product/brands were to be sold by the Petitioner and the Respondent No. 2 in the respective areas/territories for the initial period of 18 months. Thereafter, the parties could sell the product/brands in each others' territories as demarcated in the agreement included launching new product and in new territories.
(e) A de-merger plan was to be drawn up whereby the petitioner has agreed to relinquish Respondent No. 2's share of the assets and liabilities by way of de-merging a new company, namely D.R. John's Lab Healthcare Private Limited and the existing company's name shall be changed to D.R. John's Lab Pharma Private Limited.
(f) It was also agreed between the petitioner and the Respondent No. 2 that Logos of Respondent No. 1 shall be retained by the Petitioner.
9. In para 16 reference has been made to the detail chart of stock transferred to Respondent No. 2 which has been prepared as per the provisions of the MOU by Respondent No. 1-company. (P6). The petitioner has further averred that he then started pursuing the enforcement of terms for division with Respondent No. 2 as per the provisions of the MOU. However it is alleged that despite repeated requests respondent No. 2 failed to initiate the process of division, demerger on account of mala fide intention.
10. There are allegations against Respondent No. 2 in para 17 that he started making fresh demand for share of a net profit as on 12.2.2009 which was not even stipulated in the MOU for Respondent No. 2 to exist from Respondent No. 1-company. A reference has been made to the effort made by the petitioner to seek cooperation of respondent No. 2 for implementation of the terms of the MOU. In that regard a reference has also been made to the letter dated 13.6.2009 and the email dated 13.1.2010, 15.1.2010 and 22.11.2010. In para 21 the shareholding of respondent No. 2 has been mentioned which was transferred to the petitioner upon payment of Rs. 3.07 crores in 10 equal half yearly tranches and that a sum of Rs. 30,70,000/- had already been paid.
11. In para 22 it has also been conceded that the petitioner and Respondent No. 2 came to a settlement on 3.3.2010 (P10). Thereafter the petitioner approached respondent No. 2 with an offer that he would pay for the entire shares held by respondent No. 2 in the Respondent No. 1-company to secure immediate exit of respondent No. 2 from the company. In that regard an agreement to transfer shares was executed in the form of an addendum dated 13.3.2010 to the MOU (P11). In the recital it is clearly recorded that parties desire to clarify some ambiguity in the MOU dated 18.3.2009 which shows that it was a clarification addendum which also included an arbitration clause. Accordingly the parties agreed that a payment of Rs. 30,70,000/- each was to be made on 27 March, September 2010, 2011, 2012, 2013 and 27 March, 2014. In lieu thereof Respondent No. 2 was to transfer his 24895 shares to the petitioner for each tranche paid to respondent No. 2. A reference has also been made to a draft scheme of demerger/acquisition on 11.3.2010 (P. 12). However one more addendum dated 26.3.2010 was entered into between the petitioner and Respondent No. 2 to further clarify certain other ambiguities in the MOU dated 18.3.2009 and to amend the MOU to that extent (P. 13). The party therein had agreed as follow:
(i) Both the parties are free to launch (start the sales & marketing) the products in other Party territories with their respective Brands with effect from 1.8.2010.
(ii) Both the parties are agreed that they may send the products in other party. Reserved territories to their C&F before 1.8.2010 for launching the products but shall not raise any invoice prior to 1.8.2010 from C&F to the stockiest.
(iii) D.R. John's Lab Healthcare Private Limited (Respondent No. 3) represented by Mr. Rajeev Jetly (Respondent No. 2) shall develop and launch their products with New Pattern and New Logo (monogram) and D.R. John's Lab Pharma Pvt. Ltd. represented by Mr. Ramnish Sharma may use the exiting Logo of D.R. John's Lab Pvt. Ltd. with new pattern for their products.
(iv) All the parties are agreed to launch their brands in new packaging with their respective name of company in the to her party reserved territories with effect from 1.8.2010.
(v) The Brands divided as per the MOU dated 18.3.2009 shall be launched in the other party reserved territories in new packaging only. However, the New changed Brands/new Bands stock owned by the respective parties may be sold in the old packaging in the other party territories till it exhausted for example Old Brand magma cannot be launched in reserved territories in old packaging but Beta EC that is new changed Brand unsold stock may be sold in reserved territories till the stock exhausted.
(vi) The launching of the products of the new companies represented by both the parties shall be in the new design of packaging and shall not use the pattern of the Principle company i.e. D.R. John's Lab Pvt. Ltd.
12. In pursuance to addendum dated 26.3.2010 the petitioner had made payment in lieu of 2 tranche of Rs. 30,70,000/- to the Respondent No. 2 on 27.3.2010. However it is alleged that respondent No. 2 failed to transfer the shares and cooperate for the demerger.
13. The whole petition is modelled on the aforesaid MOU dated 18.3.2009 and two addendums dated 13.3.2010 and 26.3.2010. In the acts of oppression the various illegal additional payments have been referred as a prize for cooperation for implementation of the scheme of the demerger and/or to exit the respondent No. 1 in terms of the MOU and addendums thereto.
14. It is in the aforesaid facts and circumstances the petitioner has approached this court for granting of following reliefs:—
(i) Draw up a scheme for management of the affairs of Respondent No. 1
(ii) Direct the Respondent No. 2 not to interfere in any affairs or management of the Respondent No. 1
(iii) Remove the Respondent No. 2 as a Director of the Respondent No. 1 company.
(iv) Direct a scheme for regulation of the conduct of company's affairs in future which would ensure protection against the interference and obstruction by the Respondent No. 2.
(v) Appoint a director to be the nominee of the petitioner on the Board of Director of the Respondent No. 1
(vi) Director the Respondent No. 2 not to exercise any voting rights in respect of above said shares yet to be transferred in favour of petitioner.
(vii) Direct the Respondent No. 2 to close the bank accounts in the name of Respondent No. 1 which are operated and managed by the Respondent No. 2.
(viii) Direct the Respondent No. 1 to record in the register of members the change in ownership of 49790 share (10% of shareholding) in favour of the petitioner.
(ix) Direct the sale of the shares (including execution of transfer forms and handing over share certificates) held by the Respondent No. 2 in favour of the petitioner upon payment of the agreed value to the Respondent No. 2.
(x) Extend the date of filing of the statutory compliances including the submission of annual accounts to 30.9.2011 in respect of the financial year 2009-2010.
(xi) Cease and desist of further breach of fiduciary duty by directing the Respondent No. 2 not to use a Logo of Respondent No. 3 which is similar or deceptively similar to the Logo of Respondent No. 1 company and stop all the existing stock under the control of the Respondent No. 2 which bars similar or deceptively similar logo.
(xii) Restrain the Respondent No. 3's business activities as regards the use of its LOGO which is deceptively or confusingly similar to that of the Respondent No. 1 in terms of MOU and 2 addendum to the MOU.
(xiii) Direct Respondent No. 2 to pay Respondent No. 1 the value of stock transferred and/or purchased by the Respondent No. 2 as per paragraphs 16 and 36 of this petition.
(xiv) Direct the Respondent No. 2 to pay immediately all the contingents liabilities in respect of which notices have been received by the Respondent No. 1 and as its stands on 31.7.2010 in terms of the MOU and the a addendums thereto.
(xv) Direct Respondent No. 2 to pay Rs. 20 crores as damages in lieu of breach of his fiduciary duty towards the Respondent No. 1 and perpetration of conflict of interest as a Director of Respondent No. 1 and his own company Respondent No. 3 during the pendency of the demerger process.
(xvi) Any other relief(s)/order(s)/direction(s) which in opinion of Hon'ble Board is/are just and equitable and are in the interest of the company.
15. A perusal of prayer (i), (ii) and (iv) would show that all these prayers are based on the MOU dated 18.3.2009, and the two addendums 13.3.2010 and 26.3.2010. As per the provisions of MOU it was broadly agreed that respondent No. 2 was to transfer his shares on acceptance of value thereof. It was later agreed that the payment of value of the share to the extent should prevent the transfer of specified number of shares. As a result Respondent No. 2 was to exit the Respondent No. 1-company. The prayers seeking directions to Respondent No. 2 to refrain from interfering in the affairs of respondent No. 1-Company or his removal are necessarily based on the aforesaid three documents namely MOU and two addendums. The prayer for appointment of nominee director of a petitioner on the Board of Director of Respondent No. 1-company and direction to Respondent No. 2 not to exercise any voting rights are necessarily emerging from clauses of MOU. Likewise the prayers made in paras (vii) (viii) (ix) (xi) (xii) (xiii), (xiv), (xv) & (xvi) also emerge from various clauses of MOU and two addendums.
16. In our considered view the company petition is nothing else but a dressed up petition and is not covered by the provision of chapter 6 of the Companies Act, 1956. Merely by modifying the prayer or using different expression in various paras of the petition prefacing it with the allegations of ‘oppression and mismanagement’ a petition would not assume the character of a petition u/s. 397, 398 and 402 of the Companies Act. The arbitration proceedings are pending before the arbitrator and the matters concerning all the allegations based on MOU and the two addendums. The reliefs which have been claimed in the petition can be claimed and granted by the Arbitrator. Therefore we find that the application filed by Respondent No. 2 under section 8 of the Arbitration and Conciliation Act merits acceptance.
17. It is true that the Tribunal is clothed with wide powers which are aimed at correctional mechanism to rescue an ailing company by preventing the oppression and mismanagement as has been held by the Hon'ble Supreme Court in case of Cosmosteels Private Ltd. v. Jairam Das Gupta, (1978) 48 Com case 312 and Shanti Prasad Jain v. Kalinga Tubes Ltd., (1965) 35 com case 351. There is a catena of judgments delivered by High Courts and we do not wish to burden this order by citing each one of those judgements. Suffice it to say that wide powers are vested with the Tribunal by virtue of the provisions of sections 397, 398, 402 & 403 of the Companies Act (now section 241, 242 & 244 of 2013 Act) as has been interpreted by courts. Notwithstanding these provisions it does not denude this Tribunal from refusing to entertain a petition which in fact is based on a breach of contract with an arbitration clause. On the excuse and pretext of ‘oppression and mismanagement’ the petitioner cannot be given a colour of a dispute of ‘oppression and mismanagement’. Therefore we do not find any substance in the arguments of the counsel for the non applicant-petitioner that the company petition is aimed at only preventing the ‘oppression and mismanagement’.
18. As a sequel to above discussion C.A. No. 366/2011 succeeds. Consequently the C.P. No. 46/ND/2011 is disposed of.
19. All other applications and the company petition stand disposed of.