OP Gupta v. Shiv General Finance Ltd. and Anr. 1975

Estimated Reading Time: 10 minutes

Introduction 

This case deals with the aspects of what cases can be referred to an Arbitrator as per the articles and memorandum of a Company when there is a dispute between the members and the Company. The suit is regarding an application filed under Section 34 of the Arbitration Act which states that the legal proceedings should be stayed as the case should be referred to an Arbitrator. Apart from this provision, the Court noted under Section 9 of the Companies Act, where the Court can overrule all the articles of the Company concerning the operation of provisions of the Act. Further, it is mentioned that Section 397, 398, and 434 of the Companies Act are to be dealt with exclusively by the Court and not the arbitrator. 

Statement of Facts

Facts of the case simple and straight, there is an application filed under Section 34 of the Arbitration Act 1940 for staying of legal proceedings of the matter concerning Section 397 and 398 of the Companies Act 1956 which deals with the relief for oppression or mismanagement from the Companies. As per the application filed, the Articles of the Company state that M/s Shiv General Finance (P) Ltd. is to effect that any difference or dispute between the company as one party and its members as the other party will be referred to arbitration. Further, the application also mentions that the subject matter of the petition is majorly an internal dispute between the members of a private limited company and thus it should be referred to arbitration. 

As per the present case, two main grounds need to be looked at before deciding for such cases, firstly that Section 9 of the Companies Act states that all the Articles of the Company can be overruled for the operation of the provision of this Act and Section 397 (application to Company Law Board for relief of oppression), 398 (application to Company law board for relief of mismanagement) and 434 (Winding up of Company) of the Companies Act are the issues to be dealt by the Court exclusively, and cannot be referred to arbitration. Thus, the court believes that the particular case doesn’t qualify for being referred to arbitration and shall be dealt by the Court itself. 

Issues of the case 

The case doesn’t involve much discussion and deals with one primary issue that is 

  • Whether the legal proceedings of the suit should be stayed for being referred to an arbitrator under Section 34 of the Arbitration Act 1940 as it is stated to be an internal dispute between the Company and its members. 

Contentions/ Arguments of the Applicant 

There are contentions and judgments presented by the applicant to validate his application, for putting a stay over the legal proceedings of the case and refer it to an Arbitrator as per their company’s agreement. There are certain judgments cited by the counsel of the applicant to urge the order to be in his favor. Some of them are Hickman v. Kent or Romney March Sheep Breeder’s Association 1915. Although, the Court thought, that it is an English judgment based on a different statute and cannot be related to the present case. Further, the applicant has also relied upon the judgment of a Division Bench in Gujarat High Court, Star Trading Corporation v. Rajaratna Naranbhai Mills Company Ltd. where the issue before the court was raised that the arbitration clause would be applicable even when the Company has been ordered to be wound up. Another case cited by the counsel of applicant Nalla Ramudanima v. Nolla Kasi Naidli, AIR 1945 Madras. In this case, the references have been made to arbitration regarding the pendency of suits wherein the arbitrator has made arbitration awards regarding the validity of the marriage. 

The Court didn’t find any merit in these cited judgments and questioned the applicant, that petitions filed under Section 397 and 398 are already pending before the court and there should be some strong ground for the Court to say that it will stay the proceedings and refer the matter to arbitration. The counsel for the applicant further submits that the application doesn’t intend that proceedings under Section 397 and 398 shouldn’t be decided by the Court but he means that the questions to be decided should be referred to an arbitrator. The Court noted that it would be meaningless to direct a case of Section 397 and 398 to the arbitrator as he wouldn’t have any powers to pass an order either under Section 402 or 403. 

The learned counsel of the applicant also mentioned that the Court should refrain from the matter until the arbitrator has given his award regarding the issue and once the award is passed, the Court can act in accordance with the award passed by the arbitrator. But the Court pointed out that Section 34 doesn’t allow for any staying of any suit or legal proceeding to be partially referred to the arbitrator and partially decided by the Court. So, if the Court finds that the arbitrator cannot deal with the subject matter of the suit or because of impairment of law then the Court is rightfully empowered to reject such application. Thus, any of the contentions and submissions of the applicant weren’t reasonable enough for the Court to stay the legal proceedings. 

Summary of Court decision and Judgement 

The Delhi High Court has opined that the present application under Section 34 of the Arbitration Act 1940 cannot be approved as there are no valid grounds presented by the counsel of the applicant giving reasons for putting a stay on the legal proceedings and referring the matter to an arbitrator. The petition is filed under Section 397 and 398 of the Companies Act requesting relief against oppression and mismanagement of the company. The Court further mentions that these matters can be only decided by the court and even the Companies Act 1956 has given the Court exclusive jurisdiction to protect the interests of creditors and shareholders of the Company. It is in fact the duty of the Court to safeguard the interests of creditors and shareholders. 

The Court even examined the judgments cited by the applicant, but none of them fitted or were found to be relevant with regard to its application. As in case of Nalla Ramudanima v. Nolla Kasi Naidli and Faiz Ali v. Mi. Ash Mf Khatun and Ors., the Court clarified that cases referred to arbitration during the pendency of suit under Section 21 of the Arbitration Act 1940 and requirements for obtaining stay on legal proceedings for referring the matter to arbitration under Section 34 are completely different and not at all relevant to present case. 

The Judgment in the beginning of the judgment states two grounds on which decisions regarding Section 34 of the Arbitration Act are taken. Firstly, Section 9 of the companies Act has overruled the operation of all Articles, Memorandums of the Company with respect to the operation of provisions of this Act. Secondly, the most important aspect for not approving the application for referring it to arbitration, is that Section 397, 398, and 434 of the Companies Act deal with winding up of company or regulating the oppression and mismanagement of the Company solely come under the jurisdiction of the Court and cannot be referred to arbitration. Hence, the Court finds no reason to refrain from the proceeding under its statutory powers mentioned above in the Companies Act. These proceedings will be strictly adjudicated and decided by the Court itself and under no circumstance referred to arbitration. 

The Court fails to comprehend that how the provision of Section 34 was attached to this case, as the main aim of Section 34 of Arbitration Act is to enable a party to a legal proceeding who is also party to an arbitration agreement, move a request to the court for staying the legal proceedings so that the matter can be adjudicated via arbitration as per the terms of the arbitration agreement. But the existing case is seeking protection from the court against the oppression of the majority and mismanagement of the Company and referring such a case to arbitration can lead to a biased decision in favor of the Company or its management. Hence, the aggrieved party has moved to the Court for an impartial decision against the acts of the Company. As per the Court, it would be impractical to put stay over the pending legal proceedings and refer it to some arbitrator appointed by parties, who might not be able to deliver binding order this case requires as the Court would do under Section 402 or 403 of the Companies Act. Thus, the application was accordingly rejected by the Court and imposed a cost of Rs 100 on the applicant. 

Analysis of the Case 

The present case was not a tricky case, as it solely relied upon one issue, whether the application under Section 34 will be approved and the matter before the Court shall be referred to the arbitration. But the application filed by the applicant didn’t have any solid grounds regarding the reasons or purpose for referring the matter to arbitration. The sole reason that it is an internal dispute and as per the Articles of the Company, an internal dispute shall be dealt by arbitration was not enough to convince the Court to put stay on the legal proceedings. Thus, it can be inferred that the Court was accurate in dismissing the application for staying the legal proceedings in the present case. 

As we evaluate this case, it can be stated that Section 34 was a flawed submission and it was made just to keep the issue of oppression and mismanagement of members of the Company within the boundaries of the company rather than addressing it before the Court. The decision of the court would have been the same and it would conform to the existing Company laws of our country as the matters of oppression by majority and mismanagement are serious issues and the Court or Company Law Board has the rightful jurisdiction to pass orders against such issues and protect the rights of creditors and shareholders in an impartial way. The reasoning given behind the rejection of this application is justified and reasonable and doesn’t need further evaluation. 

The Court also referred to a judgment of Dwarka Nath Kapur v. Rameshwar Nath and Ors 1966, supporting his judgment where there was a similar question raised by one of the parties in the Partnership Act. The Judge of the case stated that to dissolve a partnership on grounds of just and equity was in the hands of the Court under Section 44(g) of the Partnership Act and the Court shouldn’t refer such matters to arbitration. Certain other decisions were also taken into consideration rightly by the Court such as Oliver v. Hillier 1959 where it was clearly mentioned that no arbitrator can give absolute relief to the aggrieved under Section 397 and 398 and will also not be capable of passing an order under Section 402 or 403 of the Companies Act. Thus, the main purpose of filing this application was to avoid the petitioner from availing his all-possible relief from the Court, and hence it can be said that this application was vexatious in nature. This case might have worked as a landmark case for the Court’s role in matters of oppression and mismanagement of the Company against its members, creditors and shareholders. 

As per my evaluation, the Court has appropriately interpreted the condition of the aggrieved party and the intentions of the applicant. The Court has given a detailed description as to why Section 34 is not applicable in this case. It has even referred to Section 9(b) of the Companies Act 1956 which states that any provision in any memorandum, article, or agreement to the extent that it is repugnant to the Act shall be void. And the Article of the company relied on the applicant is inconsistent with the provisions of Section 397 and 398 of the Act 1956. Thus, the court would also declare that either the Article of the company is completely void by reason of Section 9(b) or it doesn’t apply to the current circumstance for proceedings of winding up and petition under Section 397 and 398 are moved to Court. The Court hasn’t weakened any merit or arguments of the case; instead, the court has provided rightful reasons as to why the application and its citations cannot be admitted by the Court. Looking into the facts and issue, there is no need for an alternative approach to deal with this issue as it was merely a matter of an application for referring the case to arbitration which was rejected as the Court didn’t find enough merit to approve such application. 

Conclusion 

Thus, from the above, it can be concluded that the application was supposedly filed, for restricting the petitioner to avail all possible reliefs from the Court and take the matter to arbitration, where there were high chances that no strict order could be passed against the Company as arbitrator won’t have as much power as the Court would do. Even the counsel of the applicant was unable to state the grounds for referring the case to arbitration and put stay on the ongoing legal proceedings. As per the facts of the application and decision derived by the Court, there is no error in the judgment and it will benefit the petitioner if their plea is heard before the Court rather than an arbitrator. There are no prominent lacunae that can be pointed out, from the respective judgment. 

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