CP No. 121 of 2007 and CA No. 484 of 2007. Case: Enercon Gmbh Vs Enercon India Ltd. and Ors.. Company Law Board

Case NumberCP No. 121 of 2007 and CA No. 484 of 2007
CounselFor Appellant: Sudipto Sarkar, Rahul P. Dave, Neeraj Kumar and Amit Dhingra and For Respondents: Dushyant Dave, Rohit Mahajan, Nikhil Sakhardande, Abhijit Joshi, Kunal Mehra, Madhavi Diwan, Aniruddha Rajput, Niharika Nanda and Shamik Sanjananda
JudgesS.P. Balasubramanian, Chairman
IssueArbitration and Conciliation Act 1996 - Section 8; Civil Procedure Code; Company Law Board Regulations - Regulation 14(7)
Citation2008 (3) CLJ 266, 143 CompCas 687, 83 CLA 249
Judgement DateOctober 29, 2007
CourtCompany Law Board


S.P. Balasubramanian, Chairman, (New Delhi)

In this order I am considering CA 484/2007 filed under section 8 of the Arbitration and Conciliation Act 1996 ('the Arbitration Act') (originally filed under section 45 of the Act and later amended to section 8) seeking for referring the parties to the proceeding to arbitration in terms of arbitration agreement's. This application has been filed by the 2nd respondent in CP 121/2007 which has been filed under section 397/398 of the Companies Act, 1956 ('the Act') in respect of Enercon (India) Ltd. In addition, I am also considering the interim prayers sought by the petitioner (depending on the decision in the application).

The facts of the case are: The respondents 2 to 8, known as Mehra group, incorporated the 1st respondent-company ('the company') on 10th May, 1993, in the name of Wind World Power Ltd. On 12th January, 1994. They entered into a shareholders' agreement ('SHA') with the petitioner, a German company, pursuant to which the name of the company was changed to Enercon (India) Ltd. with the main object to produce Wind Turbine Generators in collaboration with the petitioner. On the same day, i.e., 12th January, 1994, pursuant to the SHA, the company and the petitioner also entered into a technical knowhow agreement ('TKA') by which the petitioner had agreed to supply technical knowhow, information, assistance, supply of equipment and material, etc., to the company. The SHA is a comprehensive one covering capital structure, transfer and sale of shares, Board meetings, directorships, etc. It contains an arbitration clause also (article 26). Most of the terms, particularly relating to transfer of shares and directorship, were thereafter incorporated into the articles of association of the company. As per the terms of the SHA, articles provide for equal representation of both the petitioner and Mehra group on the Board of the company. Similarly, in line with the SHA, the articles also provide that the managing director ('MD') of the company would be a nominee of Mehra group and the chairman that of the petitioner. TKA also contains an arbitration clause (clause 19). In terms of the SHA, the petitioner subscribed to 51 per cent shares in the company while Mehra group subscribed to 49 per cent. Thereafter, by another SHA dated 19th June, 1998 both the petitioner and Mehra group subscribed to further shares by which the petitioner's holding became 56 per cent while that of the Mehra group to 44 per cent. Presently, the Board consists of two nominees from each. While the nominees of Mehra group, viz., respondent 2 is the MD and respondent 3 is the whole time director, the nominees of the petitioner, viz., respondent No. 36 is the chairman and respondent No. 37 is a director. The effective management of the company has been with that of the Mehra group right from the beginning. The company has 16 subsidiaries and 11 associated companies and they all have been arrayed as respondents 9 to 35.

The present petition filed by the petitioner was mentioned on 30th August, 2007 with a notice to the respondents. In the petition, the petitioner has alleged that the 2nd and 3rd respondents, being in exclusive management of the company, are guilty of systematic concealment of the state of affairs of the company, financial mismanagement, like indiscriminate borrowings, indiscriminate investments in subsidiaries and associate companies, manipulation of accounts, etc., non-supply of required information by the petitioner, non-payment of royalty to the petitioner, non-inclusion of certain items in the balance sheet and most importantly that they are attempting to sell their group shares to an outsider in violation of the provisions of pre-emption clause in the articles. With these allegations, the petitioner has sought for removal of the 2nd and 3rd respondents as MD and whole-time director ('WTD') respectively not only of the company but also of the subsidiary and associate companies, for amending article 171 to delete the provision for representation on the Board to Mehra group, for directions to Mehra group to transfer their 44 per cent shares to the petitioner, directions for investigation into the affairs of the company, etc.

While mentioning the petition, Shri Sarkar, senior advocate for the petitioner, also sought for certain interim reliefs which was opposed by Shri Dave, senior advocate for Mehra group, on the ground that the petition was not maintainable and that pending disposal of the instant application, no interim reliefs could be considered. Accordingly, I heard both on the application and the interim reliefs.

Moving CA 484/2007, Shri Dave, senior advocate for Mehra group, submitted: The disputes raised in the petition have arisen squarely out of the terms SHA and the TKA both of which contain arbitration clauses. The main prayer of the petitioner in the petition is removal of the 2nd and 3rd respondents as MD and WTD, respectively as also directions to Mehra group to sell their shares to the petitioner. In terms of article 2(5) of the SHA, Mehra group is entitled to appoint one of its nominee as the MD with considerable powers of management and the right to remove its nominee is vested only with Mehra group in terms of article 2.2 of SHA. Similarly, article 5 of the SHA deals with the provision relating to transfer of shares and preemptive rights. This being the case, the main matters raised in the petition are matters covered in the SHA and, therefore, in terms of section 8 of the Arbitration Act, the parties should be referred to arbitration. Similarly, regarding non-payment of royalty which is one of the other allegations, TKA under which this claim has arisen, also provides for arbitration. The petitioner has alleged that is that royalty has not been paid on the basis of the alleged intellectual property licence agreement ('IPLA') dated 29th September, 2006. The consistence stand of Mehra group is that no such agreement was ever entered into and it was only a draft agreement to be finalised later on and no such finality was given to the draft. Therefore, if the petitioner has any grievance relating to payment of royalty, it has to seek remedy in an appropriate court of law and not through a petition under section 397/398. Since the articles have been amended in consonance with the terms of the SHA, the petitioner cannot seek amendment to the articles in a petition under section 397/398 and has to go before the arbitrator.

Shri Sarkar, senior advocate for the petitioner, submitted: In terms of section 8, to refer the parties to arbitration, this Board should be satisfied that the subject-matter of the petition is the subject-matter of the arbitration agreement and that there is a commonality of parties. In the present case, the SHA is between the petitioner and the Mehra group and the company is not a party. Similarly, TKA is an agreement between the petitioner and the company and Mehra group is not a party. This TKA has already expired by efflux of time and is no longer effective. That is why IPLA was entered into. As a matter of fact, when the petitioner stopped supply of equipments, etc., the Mehra group filed a suit seeking for a direction to the petitioner to supply equipment in terms of SHA/TKA instead of submitting the same to arbitration, thus, very clearly indicating that Mehra group has given a go bye to arbitration. This would indicate that they do not rely on the arbitration clauses. Further, respondents 9 to 35, against which reliefs have been sought, are not parties to either of the two agreements. Further in the petition, the petitioner alleged mismanagement and there is no provision regarding the same in either of the two agreements. Even in respect of removal of the 2nd and 3rd respondents and also relating to transfer of shares, the petitioner has relied on the articles and not on the terms of the SHA. Therefore, in view of the fact that there is no commonality of parties, and that many of the allegations particularly in relation to financial mismanagement are not matters arising out of the arbitration agreements and that bifurcation between the Board and the arbitration tribunal is not permissible, the application should be dismissed.

The learned counsel relied on the following cases to support his contention.

(1) Griesheim GmbH v. Goyal MG Gases (P.) Ltd. [2004] 62 CLA 141/[2005 ] 123 Comp Cas 280 (CLB) - When a petition contains allegations concerning matters covered in the arbitration agreement and also other matters not covered by the said agreement, the matters cannot be bifurcated and those in the agreement referred to arbitration.

(2) Sukanya Holdings (P.) Ltd. v. Jayesh H. Pandeya [2003] 8 CLA-BL Supp. 70 (SC)/[2003] 5 SCC 531 - The words 'a matter' as in section 8 of the Arbitration Act indicate that the entire subject-matter of the suit should be subject to arbitration agreement. Where 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.

(3) Shri Gautam Kapoor v. Limrose Engineering [2005] 68 CLA 86 (CLB) - The test to determine as to whether a matter in a petition under section 397/398 is to be relegated to arbitration is to examine as to whether the allegations of oppression and mismanagement contained therein can be adjudicated without reference to the terms of arbitration agreement. If it can be, then the question of referring the matter to arbitration does not arise even if the agreement covers the same matter. Further, there should be commonalities of parties.

(4) Premier Automobiles Ltd. v. Fiat India Ltd. [2004] 62 CLA 16/[20051 124 Comp Cas 40 (CLB) - The petition was dismissed on the following grounds the company in the affairs of which the petition had been filed was not a party to the arbitration agreement...

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