Scope of Section 7(5) of A & C Act 1996

1
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 4150 OF 2009
(Arising out of SLP [C] No.11117 of 2006)
M.R. Engineers & Contractors Pvt. Ltd. … Appellant
Vs.
Som Datt Builders Ltd. ... Respondent
J U D G M E N T
R.V. RAVEENDRAN, J.
Leave granted. Heard learned counsel for both parties. The matter
relates to interpretation of sub-section (5) of section 7 of Arbitration and
Conciliation Act, 1996 ('Act' for short) and the issue involved is whether an
arbitration clause contained in a main contract, would stand incorporated by
reference, in a sub-contract, where the sub-contract provided that it “shall be
carried out on the terms and conditions as applicable to the main contract.”
2. The Public Works Department, Government of Kerala, (in short ‘PW
Department’) entrusted the work of “Four Laning and Strengthening of
Alwaye – Vyttila and Aroor – Cherthala and Strengthening of Vyttila to
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Aroor Section of NH 47 – N2 & N3 packages” which included the work of
“Construction of Project Directorate Building for National Highway Four
Laning Project at Edapally, Cochin” to the respondent. The said contract
between PW Department and the respondent contained a provision for
arbitration, as per clause 67.3 of the General Conditions of Contract. The
relevant portion of the said clause is extracted below:
“Arbitration 67.3.
Any dispute in respect of which :
(a) the decision, if any, of the Engineer has not become final and
binding pursuant to Sub-Clause 67.1, and
(b) amicable settlement has not been reached within the period
stated in Sub-Clause 67.2.
shall be referred to the adjudication of a Committee of three
arbitrators. The Committee shall be composed of one arbitrator to
be nominated by the Employer, one to be nominated by the
Contractor and the third who will act as the Chairman of the
Committee, but not as umpire, to be nominated by the Director –
General (Road Development), Ministry of Surface Transport
(Roads Wing); Government of India. If either of the parties abstain
or fail to appoint his arbitrator, within sixty days after receipt of
notice for the appointment of such arbitrator, then the Director-
General (Road Development), Ministry of Surface Transport,
Government of India, himself shall appoint such arbitrator(s). A
certified copy of the appointment made by the Director-General
(Road Development), Ministry of Surface Transport, Govt. of
India, shall be furnished to both parties.”
x x x x x x x x x x
3. The appellant is a sub-contractor of the respondent. Respondent
entrusted a part of the work entrusted to it by the PW Department namely
“construction of Project Directorate building” to the appellant under its
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work order dated 4.5.1994. The relevant portions of the work order are
extracted below:
“With reference to your offer and subsequent discussions, we are
pleased to accept your offer for the construction of the office
building at the unit, firm and fixed price of Rs.3150/- (Rupees
Three Thousand One Hundred Fifty Only) per square metre. The
construction shall be carried out as per the tender specifications
and drawings issued for construction by the client.
The square metre rate includes cost of all materials, labour,
equivalent etc., required for the completion of building work but
excludes the furniture required for the same. No escalation shall be
payable on the above contracted price. The work shall be carried
out as per the drawings furnished by the Department. This subcontract
shall be carried out on the terms and conditions as
applicable to main contract unless otherwise mentioned in this
order letter.
In case there are any change in the foundation design from the
tender drawing, suitable variation claim shall be submitted to the
client by us and the amount approved and paid shall be payable to
you after deducting twenty percent amount.”
x x x x x x x x x x
The approximate cost of this order comes to Rs.33,07,500/-
(emphasis supplied).
4. The appellant alleges that it informed the respondent that it executed
certain extra items and excess quantities of agreed items on the instructions
of the PW Department and requested the respondent to make a claim on the
PW Department in that behalf; that the respondent accordingly made
necessary claims in that behalf on the PW Department; that the said claims,
as also several other claims of the respondent against the PW Department
were referred to arbitration and the arbitrator made an award dated
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18.8.1999. According to appellant, the Arbitrator awarded certain amounts
in regard to its claims put through the respondent and in terms of the
arrangement between the respondent and the appellant, the respondent is
liable to pay to the appellant, eighty percent of the amounts awarded for
such claims, that is Rs.37,55,893/-, along with Rs.1,55,807/- towards prereference
interest upto 4.12.1996 and compensation at 18% per annum for
non-payment of Rs.37,55,893/- from 5.12.1996. The appellant alleged that a
sum of Rs.1,76,936/- was also due by the respondents towards unlawful
deductions. The appellant therefore lodged a claim on the respondent by
letter dated 5.7.2000, for payment of Rs.65,11,341/-. As the claim was not
settled, the appellant sent a letter dated 6.12.2000 seeking reference of the
disputes by arbitration.
5. As the respondent failed to comply, the appellant filed an application
under section 11 of the Act. According to the appellant clause 67.3 of the
General Conditions of Contract forming part of the contract between the PW
Department and the respondent, providing for arbitration, was imported into
the sub-contract between respondent and appellants. The appellant relies
upon the term in the work order dated 4.5.1994 that the “sub-contract shall
be carried out on the terms and conditions as applicable to main contract” to
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contend that the entire contract between the department and the respondent,
including clause 67.3 relating to arbitration, became a part and parcel of the
contract between the parties. The appellant also contended that having
regard to section 7(5) of the Arbitration & Conciliation Act, 1996, the
arbitration clause contained in the main contract between the PW
Department and the respondent, constituted an arbitration agreement
between the respondent and appellant on account of the incorporation
thereof by reference in the contract between the appellant and respondent.
The respondent denied the said claim and contention.
6. The designate of the Learned Chief Justice by order dated 31.1.2003
rejected the said application on the ground that the arbitration clause (in
the contract between PW Department and the respondent) was not
incorporated by reference in the contract between the respondent and
appellant. The said order is challenged in this appeal by special leave.
The question that arises for consideration is whether the provision for
arbitration contained in the contract between principal employer and the
contractor, was incorporated by reference in the sub-contract between the
contractor and sub-contractor.
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7. Section 7 of the Act defines ‘arbitration agreement’. Sub-sections (1)
and (5) of section 7, relevant for our purpose, are extracted below:
“7. Arbitration agreement.--- (1) In this Part, “arbitration
agreement” means an agreement by the parties to submit to
arbitration all or certain disputes which have arisen or which may
arise between them in respect of a defined legal relationship,
whether contractual or not.
x x x x x
(5) The reference in a contract to a document containing an
arbitration clause constitutes an arbitration agreement if the
contract is in writing and the reference is such as to make that
arbitration clause part of the contract. ”
[emphasis supplied]
Having regard to section 7(5) of the Act, even though the contract between
the parties does not contain a provision for arbitration, an arbitration clause
contained in an independent document will be imported and engrafted in the
contract between the parties, by reference to such independent document in
the contract, if the reference is such as to make the arbitration clause in
such document, a part of the contract. The wording of Sec. 7(5) of the Act
makes it clear that a mere reference to a document would not have the effect
of making an arbitration clause from that document, a part of the contract.
The reference to the document in the contract should be such that shows the
intention to incorporate the arbitration clause contained in the document,
into the contract. If the legislative intent was to import an arbitration clause
from another document, merely on reference to such document in the
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contract, sub-section (5) would not contain the significant later part which
reads : “and the reference is such as to make that arbitration clause part of
the contract”, but would have stopped with the first part which reads : “The
reference in a contract to a document containing an arbitration clause
constitutes an arbitration agreement if the contract is in writing.” Section
7(5) therefore requires a conscious acceptance of the arbitration clause from
another document, by the parties, as a part of their contract, before such
arbitration clause could be read as a part of the contract between the parties.
But the Act does not contain any indication or guidelines as to the conditions
to be fulfilled before a reference to a document in a contract, can be
construed as a reference incorporating an arbitration clause contained in such
document, into the contract. In the absence of such statutory guidelines, the
normal rules of construction of contracts will have to be followed.
8. There is a difference between reference to another document in a
contract and incorporation of another document in a contract, by reference.
In the first case, the parties intend to adopt only specific portions or part of
the referred document for the purposes of the contract. In the second case,
the parties intend to incorporate the referred document in entirety, into the
contract. Therefore when there is a reference to a document in a contract, the
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court has to consider whether the reference to the document is with the
intention of incorporating the contents of that document in entirety into the
contract, or with the intention of adopting or borrowing specific portions of
the said document for application to the contract. We will give a few
instances of incorporation and mere reference to explain the position
(illustrative and not exhaustive).
9. If a contract refers to a document and provides that the said document
shall form part and parcel of the contract, or that all terms and conditions of
the said document shall be read or treated as a part of the contract, or that the
contract will be governed by the provisions of the said document, or that the
terms and conditions of the said document shall be incorporated into the
contract, the terms and conditions of the document in entirety will get bodily
lifted and incorporated into the contract. When there is such incorporation of
the terms and conditions of a document, every term of such document,
(except to the extent it is inconsistent with any specific provision in the
contract) will apply to the contract. If the document so incorporated contains
a provision for settlement of disputes by arbitration, the said arbitration
clause also will apply to the contract.
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10. On the other hand, where there is only a reference to a document in a
contract in a particular context, the document will not get incorporated in
entirety into the contract. For example if a contract provides that the
specifications of the supplies will be as provided in an earlier contract or
another purchase order, then it will be necessary to look to that document
only for the limited purpose of ascertainment of specifications of the goods
to be supplied. The referred document cannot be looked into for any other
purpose, say price or payment of price. Similarly if a contract between X and
Y provides that the terms of payment to Y will be as in the contract between
X and Z, then only the terms of payment from the contract between X and Z,
will be read as part of the contract between X and Y. The other terms, say
relating to quantity or delivery cannot be looked into.
11. Sub-section (5) of Section 7 merely reiterates these well settled
principles of construction of contracts. It makes it clear that where there is a
reference to a document in a contract, and the reference shows that the
document was not intended to be incorporated in entirety, then the reference
will not make the arbitration clause in the document, a part of the contract,
unless there is a special reference to the arbitration clause so as to make it
applicable.
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12. The following passages from Russell on Arbitration throws
considerable light on the position while dealing with Section 6(2) of
(English) Arbitration Act, 1996 corresponding to Sec.7(5) of the Indian Act.
(23rd Edition, see pages 52-55):
“Reference to another document. The terms of a contract may
have to be ascertained by reference to more than one document.
Ascertaining which documents constitute the contractual
documents and in what, if any, order of priority they should be
read is a problem encountered in many commercial transactions,
particularly those involving shipping and construction. This issue
has to be determined by applying the usual principles of
construction and attempting to infer the parties’ intentions by
means of an objective assessment of the evidence. This may make
questions of incorporation irrelevant, if for example it is clear that
the contractual documents in question are entirely separate and no
intention to incorporate the terms of one in the other can be
established. However, the contractual document defining and
imposing the performance obligations may be found to incorporate
another document which contains an arbitration agreement. If there
is a dispute about the performance obligations, that dispute may
need to be decided according to the arbitration provisions of that
other document. This very commonly occurs when the principal
contractual document refers to standard form terms containing an
arbitration agreement. However the standard form wording may
not be apt for the contract in which the parties seek to incorporate
it, or the reference may be to another contract between parties at
least one of whom is different. In these circumstances it may be
possible to argue that the purported incorporation of the arbitration
agreement is ineffective. The draftsmen of the Arbitration Act
1996 were asked to provide specific guidance on the issue, but they
preferred to leave it to the court to decide whether there had been a
valid incorporation by reference. “
[Para : 2.044]
“Subject to drawing a distinction between incorporation of an
arbitration agreement contained in a document setting out
standard form terms and one contained in some other contract
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between different parties, judicial thinking seems to have
favoured the approach of Sir John Megaw in Aughton, namely
that general words of incorporation are not sufficient. Rather,
particular reference to the arbitration clause needs to be made
to comply with s. 6 of the Arbitration Act 1996, unless special
circumstances exit.”
[Para : 2.047]
“Reference to standard form terms. If the document sought to
be incorporated is a standard form set of terms and conditions the
courts are more likely to accept that general words of incorporation
will suffice. This is because the parties can be expected to be more
familiar with those standard terms including the arbitration
clause.”
[Para : 2.048]
After referring to the view of Sir John Megaw, in Aughton Ltd. v. M.F. Kent
Services Ltd. [1991 (57) BLR 1] that specific words were necessary to
incorporate an arbitration clause and that the reference in a sub-contract to
another contract’s terms and conditions would not suffice to incorporate the
arbitration clause into the sub-contract, followed in Barrett & Son
(Brickwork) Ltd. v. Henry Boot Nanagement Ltd. [1995 CILL 1026, Trygg
Hansa Insurance Co. Ltd. v Equitas Ltd. [1998 (2) Lloyds’ Rep.439) and
Anonymous Greek Co of General Insurances (The “Ethniki”) v. AIG Europe
(UK) [2002 (2) All ER 566] and Sea Trade Maritime Corp. v. Hellenic
Mutual War Risks Association (Bermuda) Ltd. (The “Athena”) No.2 –
[2006] EWHC 2530, Russell concludes:
“The current position therefore seems to be that if the arbitration
agreement is incorporated from a standard form a general
reference to those terms is sufficient, but at least in the case of
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reference to a non-standard form contract in the context of
construction and reinsurance contracts and bills of lading a
specific reference to the arbitration agreement is necessary.”
A general reference to another contract will not be sufficient to incorporate
the arbitration clause from the referred contract into the contract under
consideration. There should be a special reference indicating a mutual
intention to incorporate the arbitration clause from another document into
the contract.
The exception to the requirement of special reference is where the referred
document is not another contract, but a Standard form of terms and
conditions of a Trade Associations or Regulatory institutions which publish
or circulate such standard terms & conditions for the benefit of the members
or others who want to adopt the same. The standard forms of terms and
conditions of Trade Associations and Regulatory Institutions are crafted and
chiselled by experience gained from trade practices and conventions,
frequent areas of conflicts and differences, and dispute resolutions in the
particular trade. They are also well known in trade circles and parties using
such formats are usually well versed with the contents thereof including the
arbitration clause therein. Therefore, even a general reference to such
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standard terms, without special reference to the arbitration clause therein, is
sufficient to incorporate the arbitration clause into the contract.
13. The scope and intent of section 7(5) of the Act may therefore be
summarized thus:
(i) An arbitration clause in another document, would get incorporated
into a contract by reference, if the following conditions are fulfilled : (i) The
contract should contain a clear reference to the documents containing
arbitration clause, (ii) the reference to the other document should clearly
indicate an intention to incorporate the arbitration clause into the contract,
(iii) The arbitration clause should be appropriate, that is capable of
application in respect of disputes under the contract and should not be
repugnant to any term of the contract.
(ii) When the parties enter into a contract, making a general reference to
another contract, such general reference would not have the effect of
incorporating the arbitration clause from the referred document into the
contract between the parties. The arbitration clause from another contract
can be incorporated into the contract (where such reference is made), only
by a specific reference to arbitration clause.
(iii) Where a contract between the parties provides that the execution or
performance of that contract shall be in terms of another contract (which
contains the terms and conditions relating to performance and a provision for
settlement of disputes by arbitration), then, the terms of the referred contract
in regard to execution/performance alone will apply, and not the arbitration
agreement in the referred contract, unless there is special reference to the
arbitration clause also.
(iv) Where the contract provides that the standard form of terms and
conditions of an independent Trade or Professional Institution (as for
example the Standard Terms & Conditions of a Trade Association or
Architects Association) will bind them or apply to the contract, such
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standard form of terms and conditions including any provision for arbitration
in such standard terms and conditions, shall be deemed to be incorporated
by reference. Sometimes the contract may also say that the parties are
familiar with those terms and conditions or that the parties have read and
understood the said terms and conditions.
(v) Where the contract between the parties stipulates that the Conditions of
Contract of one of the parties to the contract shall form a part of their
contract (as for example the General Conditions of Contract of the
Government where Government is a party), the arbitration clause forming
part of such General Conditions of contract will apply to the contract
between the parties.
14. The Learned counsel for appellant relied on two decisions to contend
that even a general reference to the main contract (between PW Department
and the respondent) in the sub-contract was sufficient to incorporate the
arbitration clause in the main contract, into the sub-contract, even if there
was no special reference to the arbitration clause. We will refer to them
briefly.
14.1 The first case referred is Atlas Export Industries v. Kotak & Co. [1999
(7) SCC 61]. In that case, the appellant had contracted to supply goods to a
foreign buyer through the respondent. The contract entered among them
provided that the terms and conditions of standard contract No.15 of the
Grain & Food Trade Association Ltd., London (for short GAFTA Contract
15) would apply. The contract also confirmed that both buyers and sellers
15
were familiar with the text of GAFTA contract and agreed to be bound by its
terms and conditions. Clause 27 of GAFTA contract 15 provided for
settlement of disputes by Arbitration in London in accordance with the
Arbitration Rules of GAFTA. This Court upheld the decision of the High
Court rejecting the appellant’s objection that there was no agreement in
writing between parties requiring the disputes being referred to arbitration in
accordance with the arbitration rules of GAFTA, holding that the arbitration
clause from GAFTA Contract 15, was incorporated by reference, into the
contract.
14.2 The second case relied upon by the appellant is a decision rendered by
a designate of the Learned Chief Justice of India in Groupe Chimique
Tunisien SA v. Southern Petrochemicals Industries Corpn. Ltd. - 2006 (5)
SCC 275. In that case a purchase order placed by the respondent on the
petitioner stated that “all other terms and conditions are as per FAI terms.
(“FAI Terms” referred to the terms and conditions for sale and purchase of
phosphoric acid of Fertilizer Association of India). Clause 15 of FAI terms
provided for settlement of disputes by arbitration. Certain disputes having
arisen, the petitioner appointed its arbitrator and called upon the respondent
to appoint its arbitrator. When respondent failed to comply, the petitioner
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filed a petition under Section 11 of the Act for appointment of the second
Arbitrator. In the counter to the petition under Sec. 11 of the Act, the
respondent did not deny the fact that the purchase orders were placed with
the petitioner nor denied the fact that the purchase orders were all placed
subject to FAI terms and conditions, including clause 15 of FAI terms which
provided for arbitration. This court held that the purchase orders placed by
the respondents with the petitioner having been made subject to FAI terms
which contained the arbitration clause, the arbitration clause contained in the
FAI terms would constitute the arbitration agreement between the parties.
14.3 Both the decisions are not of any assistance to the appellant. Both
relate to reference to standard terms & conditions of Trade Associations. In
both cases the parties had agreed to be bound by the standard terms and
conditions of the Trade Association thereby clearly showing an intention to
subject themselves to the provision for arbitration contained in the standard
terms of the Trade Association. The said two decisions therefore relate to
cases referred to Para 13(iii) above, whereas the case on hand falls under
para 13(ii) above.
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15. The work order (sub-contract), relevant portions of which have been
extracted in para 3 above, shows that the intention of the parties was not to
incorporate the main contract (between the PW Department and respondent)
in entirety into the sub contract. The use of the words “This sub-contract
shall be carried out on the terms and conditions as applicable to main
contract” in the work order would indicate an intention that only the terms
and conditions in the main contract relating to execution of the work, were
adopted as a part of the sub-contract between respondent and appellant, and
not the parts of the main contract which did not relate to execution of the
work, as for example the terms relating to payment of security deposit,
mobilization advance, the itemised rates for work done, payment, penalties
for breach etc., or the provision for dispute resolution by arbitration. An
arbitration clause though an integral part of the contract, is an agreement
within an agreement. It is a collateral term of a contract, independent of and
distinct from its substantive terms. It is not a term relating to ‘carrying out’
of the contract. In the absence of a clear or specific indication that the main
contract in entirety including the arbitration agreement was intended to be
made applicable to the sub-contract between the parties, and as the wording
of the sub-contract discloses only an intention to incorporate by reference
the terms of the main contract relating to execution of the work as contrasted
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from dispute resolution, we are of the view that the arbitration clause in the
main contract did not form part of the sub-contract between the parties. We
are fortified in this view, by the decision in Alimenta SA. v. National
Agricultural Co-op. Marketing Federation of India Ltd. [1987 (1) SCC 615].
The NAFED – the respondent therein entered into two contracts with
Alimenta S.A. for the supply of certain goods referred to HPS. Clause 11 of
the first contract stipulated that “other terms and conditions as per FOSFA-
20 contract terms”. (FOSFA-20 being a standard form of contract of the
Federation of Oils, Seeds and Fats Association Ltd. containing an
Arbitration clause). Clause 9 of the second contract provided that “all other
terms and conditions for supply not specifically shown and covered
hereinabove shall be as per previous contract signed between us for earlier
supplies of HPS”. The question before this court was whether the arbitration
clause in FOSFA -20 was incorporated in the first contract by way of Clause
11 and in the second contract by virtue of Clause 9. The Court held that
while the Arbitration clause was incorporated in the first contract, the same
was not incorporated in the second contract. The following reasoning of the
Court while dealing with the second contract is relevant for our purpose:
“There is a good deal of difference between Clause 9 of this
contract and Clause 11 of the first contract. Clause 11 has been
couched in general words, but Clause 9 refers to all other terms
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and conditions for supply. The High Court has taken the view that
by Clause 9 the terms and conditions of the first contract which
had bearing on the supply of HPS were incorporated into the
second contract, and the term about arbitration not being
incidental to supply of goods, could not be held to have been lifted
as well from the first contract into the second one.”
“It is, however, contended on behalf of the appellant that the High
Court was wrong in its view that a term about arbitration is not a
term of supply of goods. We do not think that the contention is
sound. It has been rightly pointed out by the High Court that the
normal incidents of terms and conditions of supply are those which
are connected with supply, such as, its mode and process, time
factor, inspection and approval, if any, reliability for transit,
incidental expenses etc. We are unable to accept the contention of
the appellant that an arbitration clause is a term of supply. There is
no proposition of law that when a contract is entered into for
supply of goods, the arbitration clause must form part of such a
contract. The parties may choose some other method for the
purpose of resolving any dispute that may arise between them. But
in such a contract the incidents of supply generally form part of the
terms and conditions of the contract. The first contract includes the
terms and conditions of supply and as Clause 9 reference to these
terms and conditions of supply, it is difficult to hold that the
arbitration clause is also referred to and, as such, incorporated into
the second contract. When the incorporation clause refers to
certain particular terms and conditions, only those terms and
conditions are incorporated and not the arbitration clause. In the
present case, Clause 9 specifically refers to the terms and
conditions of supply of the first contract and the second contract
and accordingly, only those terms and conditions are incorporated
into the second contract and not the arbitration clause. The High
Court has taken the correct view in respect of the second contract
also”.
(emphasis supplied)
16. Even assuming that the arbitration clause from the main contract had
been incorporated into the sub-contract by reference, we are of the view that
the appellant could not have claimed the benefit of the arbitration clause.
This is in view of the principle that the document to which a general
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reference is made, contains an arbitration clause whose provisions are
clearly inapt or inapplicable with reference to the contract between the
parties, it would be assumed or inferred that there was no intention to
incorporate the arbitration clause from the referred document. In this case
the wording of the arbitration clause in the main contract between the PW
Department and contractor makes it clear that it cannot be applied to the
sub-contract between the contractor and the sub-contractor. The arbitration
clause in the main contract states that the disputes which are to be referred
to the committee of three arbitrators under clause 67(3) are disputes in
regard to which the decision of the Engineer (‘Engineer’ refers to person
appointed by State of Kerala to act as Engineer for the purpose of the
contract between PW Department and the respondent) has not become final
and binding pursuant to sub-clause 67.1 or disputes in regard to which
amicable settlement has not been reached between the State of Kerala and
the respondent within the period stated in sub-clause 67.2. Obviously neither
67.1 nor 67.2 will apply as the question of ‘Engineer’ issuing any decision
in a dispute between the contractor and sub-contractor, or any negotiations
being held with the Engineer in regard to the disputes between the contract
and sub-contractor does not arise. The position would have been quite
different if the arbitration clause had used the words “all disputes arising
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between the parties” or “all disputes arising under this contract”. Secondly
the arbitration clause contemplates a committee of three arbitrators, one
each to be appointed by the State of Kerala and the respondent and the third
(Chairman) to be nominated by the Director General, Road Development
Ministry of Surface, Transport, Roads Wing, Govt. of India. There is no
question of such nomination in the case of a dispute between the contractor
and sub-contractor. It is thus seen that the entire arbitration agreement
contained in the main contract between the employer and the contractor was
tailor-made to meet the requirements of the contract between the employer
and the contractor and is wholly inapt and inapplicable in the context of a
dispute between the contractor and the sub-contractor. This makes it clear
that the arbitration clause contained in the main contract would not apply to
the disputes arising with reference to the sub-contract.
17. In view of our finding that there is no arbitration agreement between
the parties, it is unnecessary to examine the contention of the respondent
that no dispute existed between the parties in view of the full and final
settlement receipt executed by the appellant.
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18. We are therefore of the view that there is no error in the order of the
High Court rejecting the application of the appellant on the ground that there
is no arbitration agreement.
…………………………J.
(R V Raveendran)
New Delhi; ………………………..J.
July 7, 2009. (J M Panchal)
23

Proceeding u/s 9 of A & C Act 1996

OMP No. 65/2008 Page 1 of 19
*IN THE HIGH COURT OF DELHI AT NEW DELHI
+ OMP No. 65/2008
Reserved on : 8th July, 2009
% Date of decision: 15th July, 2009
M/S VALUE ADVISORY SERVICES ….… Petitioner
Through: Mr. P.V. Kapur, Sr. Advocate with Ms. Chetna Gulati, Advocate.
Versus
M/S ZTE CORPORATION & ORS ....... Respondents
Through: Mr. Dayan Krishnan & Mr. Gautam Narayan, Advocates for Respondent No.3.
CORAM :-
HON’BLE MR. JUSTICE RAJIV SAHAI ENDLAW
1. Whether reporters of Local papers may
be allowed to see the judgment? Yes
2. To be referred to the reporter or not? Yes
3. Whether the judgment should be reported Yes
in the Digest?
RAJIV SAHAI ENDLAW, J.
1. Petition has been preferred under Section 9 of the Arbitration Act, 1996 for interim measures. The petitioner is stated to be involved in an International Commercial Arbitration of the International Chamber of Commerce with the respondents No. 1 and 2. The senior counsel for the petitioner informs that the said arbitration is at a final stage and the award has been reserved. It is informed that the petitioner has monetary claims against the
OMP No. 65/2008 Page 2 of 19
respondents No. 1 and 2. The respondent No.1 is a corporation incorporated in China and respondent No.2, an Indian Company, is stated to be a subsidiary of the respondent No.1. M/s ITI Limited has been impleaded as the respondent No.3. It is stated that monies are due from the respondent No.3 to the respondents No. 1 and 2.
2. The petitioner had earlier filed another petition under Section 9 of the Act against the same respondents and which was registered as OMP.No.359/2006. Vide ex parte order dated 4th August, 2006 in OMP 359/2006, on the petitioner expressing apprehension that if the respondent No.3 releases all monies due to the respondents No.1 and 2, the petitioner will be left with no means to recover the monies ultimately awarded to it, the respondent No.3 was restrained from releasing to the respondents No. 1 and 2 the amount then stated to be due to the petitioner from the respondents No. 1 and 2. The respondents No. 1 and 2 failed to appear in OMP.No. 359/2006 in spite of entering appearance and were ordered to be proceeded against ex parte. The said OMP was disposed of vide order dated 27th August, 2007. Though the said order notices that the respondent No.3 is a third party to the contract, however, on the statement at bar of the counsel for the respondent No.3 that the respondent No.3 shall not release the payment to the respondents No.1 and 2 in terms of prayer (e) of OMP 359/2006 without prior permission of the court or till the disposal of the arbitration proceedings pending in Singapore, the ex parte order was made absolute and the OMP was disposed of. The said order remains in force.
3. The petitioner has now moved this OMP for the relief of restraining the respondent No.3 from releasing the payments in the
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sum of USD 3476258 to the respondent No.1 and for directing the respondent No.3 to deposit the said sum and/or its Indian equivalent in this court. The first of the aforesaid reliefs is squarely covered by the relief granted in the earlier OMP. The petition has been urged only on the ground of direction to the respondent No.3 to deposit the amounts in this court.
4. The respondent No.3 has filed reply in opposition to the petition and the grant of the relief aforesaid and has pleaded –
i) that it is not a party to the agreement containing the arbitration clause and not concerned with the dispute between the petitioner on the one hand and the respondents No.1&2 on the other hand and no petition under Section 9 of the Act lies against it, especially when the main/principle relief claimed in the petition is against a non-party to the arbitration agreement;
ii) that till the award for any amount in favour of the petitioner, the petitioner cannot be said to be entitled to any amount from the respondent No.2 and hence not entitled to deposit in this court of any amount;
iii) that even in the earlier OMP No.359/2006 the petitioner had sought the relief of deposit of the monies due from the respondents No.3 to the respondents No.1&2 in this court and the respondent No.3 had contested the said relief inter-alia on the ground that it was a sick company within the meaning of Sick Industrial Companies Act, 1985 (SICA) and was before the BIFR and petitioner in the garb of the relief under Section 9 of
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the Act could not circumvent the provisions of SICA and further that any order of deposit of the monies in this court would jeopardize the scheme of rehabilitation formulated by the operating agency appointed by the BIFR for rehabilitation of the respondent No.3;
iv) the court while passing orders in OMP No.359/2006 had not returned any finding of the petition under Section 9 being maintainable against the respondent No.3, a non-party to the arbitration agreement and had merely acted on the consent given by the respondent No.3; that the order therein was in the nature of the consent order and if the petitioner desires to challenge the same, the respondent No.3 is entitled to withdraw the consent given in OMP No.359/2006.
5. Though notice of the petition was issued to all the respondents but the record reveals that the respondents No.1&2 remained unserved. However, considering that the respondents No.1&2 had failed to appear in OMP No.359/2006 also in spite of service and further considering the nature of the controversy in the present case, need was not felt to postpone the matter further for service of the respondents No.1&2 and the senior counsel for the petitioner and the counsel for the respondent No.3 have been heard.
6. The senior counsel for the petitioner has contended:
a) That the contention of the respondent of being sick is misconceived in as much as the courts have held that the bar under Section 22 of SICA, 1985 applies only when the amounts claimed are shown to be admitted and are part of the scheme of rehabilitation of
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the sick company; the respondent No.3 has in its reply nowhere stated that the liability for the amounts to the petitioner or to the respondents No.1&2 is admitted or is shown in the scheme of rehabilitation. Reliance in this regard is placed on Mafatlal Industries Ltd Vs MTNL 99(2002) DLT 204;
b) that there is no bar in Section 22 or any other provision of SICA, 1985 to the court directing a sick company to deposit the monies in the court;
c) that the provisions of SICA, 1985 do not apply to arbitration. Reliance in this regard is placed on Lloyd Insulations (India) Ltd. Vs. Cement Corporation of India Ltd. 2001 II AD (Delhi) 567 (DB);
d) that if the sick company desires to avoid an order of deposit it was for the sick company to approach the BIFR under Section 22A of SICA, 1985 and seek orders in this respect.
e) the senior counsel fairly conceded that there was a divergence of opinion in various judgments of single judges of this court on the aspect of maintainability of a petition under Section 9 of the Act against a third party;
f) Reference was made to:
i) Arun Kapur Vs. Vikram Kapur 95 (2002) DLT 42 where it was held in para 44 thereof that while a petition under Section 17 of the Act is moved before the Arbitral Tribunal for an order against a party to the proceedings, Section 9 vests remedy in a party to arbitration proceedings to seek interim measures of protection
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against the person who need not be either party to the arbitration agreement or to arbitration proceedings.
ii) CREF Finance Limited vs. Puri Construction Ltd. 2000 (3) Arb. LR 331 (Delhi) where in exercise of powers under Section 9 of the Act orders were made against a third party, of course holding the said third party to be not a stranger to the covenants between the parties to the agreement containing an arbitration clause; in that case the third party against whom orders were made was an agent of the party to the agreement.
iii) Mikuni Corporation Vs UCAL Fuel Systems Ltd 2008 (1) Arb. LR 503 (Delhi) where it was held that since no arbitration proceedings could take place vis-à-vis the party against whom orders were sought, application under Section 9 did not lie against such party. The judgment in CREF Finance Limited was distinguished since in that case the third party was an agent of a party to the arbitration agreement and reliance was placed on National Highways Authority of India Vs. China Coal Construction Group Corporation AIR 2006 Delhi 134 holding that an interim order could be passed in respect of parties to arbitration and in connection with subject matter thereof and no interim order could be passed in respect of a party who had no privity of contract with the petitioner. Thus the petition seeking interim measures against a non party to the arbitration was held to be not maintainable.
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iv) Smt. Kanta Vashist Vs. Shri Ashwani Khurana MANU/DE/0380/2008 also holding that no injunction could be issued even against companies which though of the family, members whereof were parties to the arbitration, were independent legal entities and not parties to the arbitration agreement.
g) The senior counsel for the petitioner contended that in the present case also the respondent No.3 cannot be called a total stranger to the transaction between the petitioner and the respondents No.1&2 in as much as the claims of the petitioner against the respondents No.1&2 were for agreed commission for facilitating the contract of the respondents No.1&2 with the respondent No.3. It was contended that in fact it was the petitioner who had been negotiating and dealing with the respondent No.3 on behalf of the respondents No.1&2 and the petitioner was fully in the picture of the transaction between the respondents No.1&2 on the one hand and the respondent No.3 on the other hand and the respondent No.3 was also in the know of the same.
h) It was further contended that it was not the case of the respondent No.3 that the amounts were not payable by it to the respondents No.1&2 and there was no bar in SICA to the respondents No.1&2 paying the said amounts to the respondent No.3 and thus no impediment to the deposit of the same in this court.
i) It also was contended that the order sought by the petitioner was in the nature of a garnishee order and fell
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within the ambit of Section 9 (ii) (b) of the Arbitration Act.
j) That the respondent No.3 was merely a trustee of the money and cannot take the protection of BIFR and the plea of the respondent No.3 of the order if made of deposit, interfering with the working capital of the respondent No.3 indicated that the respondent No.3 was violating the said trust and using the monies lying with it in trust, for its own purposes.
k) That the suit by the petitioner for the same reliefs as claimed in the present petition may be barred by Section 5 r/w Section 8 of the Act and if it was to be held that the petitioner was not entitled to the relief under Section 9 also, for the reason of Respondent No.3 being a third party, the petitioner would be left remediless.
l) That the Arbitration Act was not a complete or a self-contained code and thus the provisions of CPC as available to a court, of attachment of monies belonging to a judgment debtor in the hands of the others, were available. Reliance was placed on Ludwig Wunsche & Co. Vs. Raunaq International Ltd. AIR 1983 Delhi 247 and Orient Middle East Lines Ltd. Vs. M/s Brace Transport Corporation of Monrovia AIR 1986 Gujarat 62.
7. The counsel for the respondent No.3 besides relying on the same judgments as aforesaid holding petition under Section 9 to be not maintainable against a non-party to an arbitration agreement,
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contended that in the present case the respondent No.3 had nothing whatsoever to do with the transaction, if any, between the petitioner and the respondents No.1&2; he also relied on 21st Edition of Russell on Arbitration, at paragraphs 6-131 & 6-132 prescribing that a Tribunal does not have jurisdiction over a third party even though that third party may hold the monies, goods or property in dispute and the Tribunal thus is less able to secure compliance by a third party with an injunction then it is to secure compliance by the parties to the arbitration. He further contended that the order under Section 9 was in the nature of an interim order and it was a settled principle of law that interim order could only be in aid of the final order and when there was no possibility of any final order against the respondent No.3 in an arbitration between the petitioner on the one hand and the respondents No.1&2 on the other hand, the question of granting any interim order in favour of the petitioner against the respondent No.3 did not arise. He further contended that an order in the nature of a garnishee order also could be made only where the amount was admitted or agreed and no adjudication at that stage could be undertaken. It was further contended that the Division Bench of this court in Lloyd Insulations (India) Ltd. (supra) had merely held Section 22 of SICA was not a bar to the continuance of the arbitration proceedings had not dealt with the execution of arbitral award as a decree and which would definitely be within the purview of the said Section 22. He vehemently contended that no reliance could be placed by the petitioner of the earlier order which was a concession given in all fairness and in retrospect erroneously.
8. The senior counsel for the petitioner after the conclusion of hearing on 6th July, 2009 had mentioned the matter to draw attention
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to certain other documents which remained to be placed on record. On the next day, permission was granted to the petitioner to file an additional affidavit in the court. In the said additional affidavit it has been stated that a query under the Right to Information Act was made from the respondent No.3 and to which a reply dated 15th February, 2007 had been given by the respondent No.3 in which it is inter-alia stated that respondent No.3 has kept reserved a sum of USD 34,76,258/- out of the total payment due to the respondent No.1; that as on 4th August, 2006 a sum of USD 141,74,748/- and as on 30th December, 2006 a sum of USD 182,72,191/- were due to the respondent No.1 from the respondent No.3; that even after 1st March, 2006 till 23nd December, 2006 orders of the value of USD 244,493,283.62 had been placed by the respondent No.3 on the respondent No.1; that after the order dated 4th August, 2006 (Supra) in OMP No.359/2006 and till that date payment of USD 2,50,000/- had been made directly by respondentNo.3 to the respondents No. 1 and 2 and not including payments under LC by various banks; that after 4th August, 2006 LCs for the sum USD 83,84,624.18 had been opened by respondent No.3 in favour of the respondent No.1.
9. It was the contention of the senior counsel for the petitioner on the basis of the aforesaid document that since the respondent No.3 had admitted to making payments from time to time to the respondent No.1, they could have no objection, if out of the said payments, the amount claimed by the petitioner is deposited in this court instead of being paid to the respondent No.3. Reliance was also placed on K. Chandrasekharam Vs. M/s Vijay Bhargavi Chit Fund Pvt. Ltd. 2000(1)ALD761 laying down that attachment before judgment can be ordered even against a third party and on Goel Associates Vs. Jivan Bima Rashtriya Avas Samati Ltd. 114(2004)
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Delhi Law Times 478 (DB) laying down that the principle of Order 38 Rule 5 though not contained in the 1996 Act, the principles thereof are applicable.
10. The counsel for the respondent No.3 on the next day responded that in the short time available he could not take instructions but however contended that even if payments had been made after 4th August, 2006 by the respondent No.3 to the respondent No.1, the same were not to the detriment of the petitioner in as much as the amount which it had agreed to retain stood retained by the respondent No.3. Else, it was stated that the said documents did not change the pleas taken in the reply and during the oral submissions.
11. The points of controversy which arise for determination in this petition can be framed as:-
A. Whether in exercise of powers under Section 9 of the Act, the court can make an order against or with respect to any party other than a party to the arbitration.
B. If it is found that such orders can be made, whether the order as sought in the present case is in the teeth of Section 22 of SICA, 1985.
Re: Point A
12. Besides the judgments noted above, I find that recently in NAFED Vs. Earthtech Enterprises Ltd. MANU/DE/0534/09 also it has been held that an application under Section 9 can be made only
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against the parties to the arbitration agreement and cannot be entertained against third party.
13. A conspectus of the judgments aforesaid on Section 9 would show that the court in each case has made the observation with regard to maintainability/applicability of Section 9 qua third parties depending upon facts of each case and depending upon feasibility of the order sought/required therein. In my view, no general principle of maintainability/applicability or non-maintainability/non-applicability can be laid down. It will have to be determined by the court in the facts of each case whether for the purpose of interim measure of protection, preservation, sale of any goods, securing the amount in dispute, an order affecting a third party can be made or not.
14. In my view, if as a general rule it is laid down that in exercise of power under Section 9, no direction can be issued to parties not parties to agreement containing an arbitration clause or not parties to arbitration proceedings, the same will hamper the efficacy of the said provision. Under clause (i) thereof, the guardian to be appointed may not be such a party; similarly the goods under clause (ii) (a) may be or may be required to be in custody of or delivered to or sold to such third parties – further orders against such third parties may also be required in connection with such sale; under clause (ii)(b) the amount to be secured may be in the form of money payable or property in hands of such third party – the scope cannot / ought not to be restricted to securing possible with orders against parties to arbitration only. Similar examples can be given with respect to other clauses also.
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15. The proceedings in a court, as distinct from those before an arbitrator, are also between parties to an agreement/transaction only. Still, the practice of issuing interim orders/directions qua third parties exists; not only in execution proceeding, provisions wherefor exists in Sections 47, 60 and Order 21 Rules 46 and 46A to F but also in pre-decretal stage, as provided for in Order 38 Rules 6 to 11A of CPC. It is difficult to fathom and there is no indication whatsoever of it in the Act, that the legislature while empowering the court under Section 9 to grant interim measures has restricted the power aforesaid of the court in any manner. On the contrary, Section 9 provides that the court for the purposes of Section 9 “shall have the same power for making orders as it has for the purpose of, and in relation to, any proceedings before it”. The conclusion is thus inescapable that if the court, in relation to proceedings before it could have made an order against/qua third parties, similar order can be made under Section 9 as well, subject to the discussion below.
16. The CPC, at pre decretal stage, permits attachment of property to satisfy any decree which may be passed in the suit (Order 38 Rule 6). Such attachment can also be of property of defendant, not in possession of defendant but belonging to the defendant and over which defendant has disposing power or which is in possession of another person in trust for or on behalf of judgment debtor. The rules for such attachment are the same as of attachment in execution of decree (Order 38 Rule 7). Such attachment of property of judgment debtor in hands of others is permissible under Section 60 CPC. There is no reason for holding that if the claimant in an arbitration had been a plaintiff in a suit and could have obtained attachment before judgment of property of defendant in hands of
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third parties, merely because he is before an arbitrator, he is not entitled to such order. Such orders can be crucial. Normally proceedings before court or before arbitrator take time. The defendant cannot during the said time be permitted to arrange his affairs in a manner to leave the plaintiff/claimant with merely a paper decree/award. An attachment before judgment under Order 38 Rule 11 CPC continues post judgment also. If it is to be held that in arbitration proceedings such interim relief of attachment of properties of respondent/defendant is not possible, it will discourage rather than encourage arbitration, which is the need of the hour.
17. However whenever attachment qua properties/monies in hands of third parties is made, the possibility of such third party contesting the same cannot be ruled out; while the party seeking attachment may aver the property to be of person against whom he is seeking a decree, the third party may set up title in such property in himself or in yet another party or resist attachment on other grounds. Order 38 Rule 8 CPC provides for adjudication of such claims by the court. The question which arises is, whether and how such disputes to attachment, if raised pursuant to attachment under Section 9 are also to be adjudicated. The necessary corollary to what I have held above is that the court, even in a proceeding under Section 9 will have to adjudicate such disputes. Order 38 Rules 7,8 and 11A apply the provisions of attachment in relation to execution in Order 21 Rules 46, 46A to F, to attachment before judgment also. Rule 46C of Order 21 provides for trial of disputed questions where such third party disputes liability, as a suit.
18. However, considering the nature of proceeding under Section 9, I find that the court is not bound to, where the third party, with
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respect to property/money in whose hands attachment is issued, denies liability and such denial raises disputed questions of fact which cannot be adjudicated without trial, to conduct trial. The court, in such cases in its discretion can on a prima facie view of the matter, either refuse to exercise powers under Section 9 or pass other appropriate order to protect the interest of all parties concerned.
19. Thus the first point of controversy framed above is answered accordingly. Axiomatically, interim measure in the nature of attachment before judgment can be sought by petitioner against respondent No.3 and the plea of respondent No.3 to such an order is to be decided in these proceedings only. That will answer the second point of controversy as well. The plea of respondent No.3 does not entail any disputed questions of facts requiring trial.
20. Under Order 21 Rule 46 attachment is prescribed to effect by prohibiting payment/delivery until further orders, to the defendant/judgment debtor. To that extent, the respondent No.3 has in the earlier OMP already consented. The question is whether an order of deposit in court of the monies due from respondent No.3 to Respondents No. 1 and 2 can be made. Prior to 1976 amendment of CPC, such order of deposit was not contemplated under Rule 46 of Order 21. Under sub-rule 3 an option was given to the third party with respect to monies/goods in whose hands attachment was issued to deposit the same in court, in discharge of his liability. However, the court could not compel such third party to deposit in court. It was so held in Maharajadhiraj Sir Kameshwar Singh Bahadur Vs. Kuleshwar Singh and Ors. AIR 1942 Patna 508. By the 1976 amendment of CPC, Rule 46A was introduced, whereunder the order
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against third party of deposit in court also became possible. However, that provision is in Order 21 relating to execution of decree. Though by virtue of Order 38 Rules 7, 8 and 11A attachment before judgment has to be in the same manner as in Order 21, but the court is not bound to direct deposit in court. Rule 46A itself uses the word “may” and the power thereunder is discretionary.
21. Thus in the present case, where as yet there is no decree or award in favour of petitioner and when the claims of the petitioner are being disputed by respondents No. 1 and 2, and when the interest of the petitioner is sufficiently protected by order in the earlier petition, it is not deemed appropriate to direct the respondent No.3 to deposit the monies owed by it to respondents No. 1 and 2, in this court. The reason of respondent No.3 using the said monies for its own purpose also does not sway me to direct so, for the reasons of Section 22 of SICA, 1985, though ordinarily the possibility of such third party/garnishee dissipating the monies may be a reason for directing deposit in court. I do not find the respondent No.3 to be in the position of a trustee. Also, there is considerable force in the contention of counsel for respondent No.3 that the petitioner had sought the said relief in the earlier petition also and it was not so granted. There is no change in position since then. The principles of res judicata apply to interim orders also and the petitioner cannot relitigate.
Re: Point B
22. The attachment of monies in hands of a third party/garnishee cannot be in supersession of/ detriment to rights of such third party/garnishee. Thus if respondents No. 1 and 2 as creditors of
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respondent No.3 could not compel the respondent No.3 to deposit the monies in court in a proceeding initiated by them or could not recover monies from respondent No.3 owing to the bar of Section 22 SICA, 1985, the petitioner, as creditor of respondents No. 1 and 2 will have no superior rights against respondent No.3.
23. In Syndicate Bank Vs Vijay Kumar (1992) 2 SCC 331, attachment was effected with respect to the two FDRs of the judgment debtor with the bank. The bank claimed its general lien over the amounts of the FDRs. The Supreme Court held that in the circumstances the said FDRs could not be attached and the bank could not be directed to deposit the amount thereof in the court.
24. Mulla on CPC 16th Edition Volume 3, pages 2694-2695 with reference to Anglo-Baltic and Mediterranean Bank Vs Barber & Co. (1924) 2 KB 410 comments that where a judgment is recovered against a company which is in voluntary liquidation, the invariable practice of the courts is to stay execution of the judgment unless there are very exceptional reasons for exercising its discretion otherwise; it further comments that even in execution of a decree against a judgment debtor company in liquidation, a debt due by a third party to the company cannot be attached and paid to the decree holder for the reason that the said debt being general assets of the company is divisible amongst the creditors pari passu. Reference therein is also made to Gauhati Bank Vs Ganpatlal Thakur (1956) Assam 301 in which case a claim under Section 153 (2) of the Companies Act had been sanctioned with respect to the garnishee bank and whereunder the amount owed by the bank to the judgment debtor was payable in installments; the decree holder was
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held to be bound by the said scheme and not held entitled to the amount in lumpsum or immediately.
25. From the aforesaid also, it follows that the objection of the respondent No.3 is to be prima facie adjudicated. It also follows that if the respondent No.3 as per the law governing it is not liable to make payment, it cannot be directed to deposit the amount in the court.
26. I have no doubt in my mind that in the circumstances aforesaid an order of deposit by the respondent no.3 of the monies, and which order is opposed by the respondent No.3, would be coercive and would be in the nature of execution, distress or the like against respondent No.3 which is a sick company. Such an order is prohibited by Section 22 (supra). The Supreme Court recently in M.D. Bhoruka Textiles Ltd Vs Kashmiri Rice Industries 2009 92 SCL 335 (SC) has also held that SICA is a special statute and overrides other acts. The words “or the like” in Section 22 are to be construed on the basis of ejusdem generis principle. Accordingly, those words may be taken to be referring to any proceeding for attachment or even for injunction or restraint against a sick company. An order directing respondent no.3 to deposit the monies in the court will be in the nature of order of recovery of money from respondent no.3 and which is not permissible.
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27. In the circumstances, the relief claimed of directing respondent No.3 to deposit money in this court is also found to be barred by Section 22, SICA, 1985.
28. The petition is dismissed, however, with no orders as to costs.
RAJIV SAHAI ENDLAW
JUDGE
JULY 15, 2009
M/PP
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whether the proceedings before the Consumer Forum should remain stayed involving similar issues pending before High Court

Issue: whether the proceedings before the Consumer Forum should remain stayed and await the decision of the outcome of the proceedings involving similar issues pending before this High Court

Title:
M/S HINDUSTAN MOTORS LTD. versus AMARDEEP SINGH WIRK & ORS.

L.P.A. No. 204 of 2009 & CM No. 6638/2009 Date of Decision: 14th May, 2009

existence of parallel or other adjudicatory Forums cannot take away or exclude jurisdiction created under the Consumer Protection Act.

The Supreme Court in the case of Secretary, Thirumurugan Co-operative Agricultural Credit Society vs. M. Lalitha & Ors. (2004) 1 SCC 305, held that having due regard to the scheme of the Consumer Protection Act and the purpose sought to be achieved to protect the interest of the consumers better, its provisions are to be interpreted broadly, positively and purposefully to give meaning to additional/extended jurisdiction, particularly when Section 3 seeks to provide remedy under the Act in addition to other remedies provided under other Acts unless there is a clear bar.

who can be said to be persons “in-charge of, and was responsible to the company for the business of the company”

CRIMINAL APPEAL NOS.1130-31 OF 2003 K.K. Ahuja Vs. V.K. Vora & Anr.

Issue: who can be said to be persons “in-charge of, and was responsible to the company for the business of the company” referredto in section 141of the Negotiable Instruments Act, 1881

Having regard to section 141, when a cheque issued by a company (incorporated under the Companies Act, 1956) is dishonoured, in addition to the company, the following persons are deemed to be guilty of the offence and shall be liable to be proceeded against and punished :
(i) every person who at the time the offence was committed, was in charge of and was responsible to the company for the conduct of the business of the company;
(ii) any Director, Manager, Secretary or other officer of the company with whose consent and connivance, the offence under section 138 has been committed; and
(iii) any Director, Manager, Secretary or other officer of the company whose negligence resulted in the offence under section 138 of the Act, being committed by the company.

While liability of persons in the first category arises under sub-section (1) of Section 141, the liability of persons mentioned in categories (ii) and (iii) arises under sub-section (2). The scheme of the Act, therefore is, that a person who is responsible to the company for the conduct of the business of the company and who is in charge of business of the company is vicariously liable by reason only of his fulfilling the requirements of subsection (1).
But if the person responsible to the company for the conduct of business of the company, was not in charge of the conduct of the business of the company, then he can be made liable only if the offence was committed with his consent or connivance or as a result of his negligence.

Madras HC: tax planning as opposed to tax evasion has legal sanction

The Madras High Court has ruled that tax planning as opposed to tax evasion has legal sanction, and if a dealer plans his transactions in such a manner that he pays less tax, it is not open to the revenue to subject him to a conscience audit or moral assessment. The power to lift the veil has to be exercised with great care and caution.

Justice V Ramasubramanian on Friday allowing petitions by a registered dealer, challenging the orders of assessment passed by the Assistant Commissioner, Coimbatore, under the Central Sales Tax Act for assessment years 2001-02, 2002-03 and 2003-04.

Associated Cement Companies Limited, Coimbatore, claimed that the cement manufactured at Madukkarai was dispatched as stock transfer to its warehouses and depots in Kerala, Karnataka and Puducherry.

Thereafter, it was sold in the respective states after paying local sales tax there. The company claimed exemption on the turnover relating to branch/stock transfer.

Suspecting the petitioner’s claim, the Assistant Commissioner (AC) issued pre-assessment notices stating that the company was moving goods to states from the factory site itself to reach the ultimate buyers there.

The company filed Form ‘F’ declarations with proof of payment of taxes in other states. The AC passed orders for the assessment years on the ground that the petitioner had failed to file the other statements and records as stipulated in Central Sales Tax (Tamil Nadu) Rules.

Aggrieved, the present petitions were filed.

Setting aside the assessment orders, Mr Justice Ramasubramanian said the dealer had a factory in Tamil Nadu and claimed exemption in the state on stock transfer made to his branches in other states.

Another dealer having a factory in another state may make similar claim in that state on the basis of the stock transferred to a branch in Tamil Nadu and the tax paid here.

While the state was deprived of revenue in the former situation, it benefited in the latter. Justice Ramasubramanian said the AC had erred in arriving at an ad hoc conclusion without an inquiry under the Act that the transactions were inter-state sales, merely on account of the goods not getting unloaded at Palakkad but proceeding further in its journey to the buyer’s place.

The Judge remitted the matter back to the AC for an inquiry after which the official should complete assessment and pass an order.

Details of the case are:
W.P.Nos.4709 to 4711 of 2009 And M.P.Nos.1,1 and 1 of 2009

Associated Cement Companies Ltd vs. The Assistant Commissioner (CT)(FAC)& ors.

Execution- simple objection -flagrant violation of the eviction decree

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 6954 OF 2003

Sardar Estates -vs- Atma Ram Properties (P) Ltd


ORDER

This appeal furnishes a typical instance of a widespread malady which has infected the judicial system in the country, namely, the flagrant abuse of the process of the Court.


The respondent, which is the owner and landlord of premises no.13/46, Scindia House, Connaught Circus, New Delhi filed an eviction petition against the appellant, who is the tenant, before the Rent Controller, Delhi in 1981. That petition was decreed on 12.5.1993 on the ground of subletting. The appellant filed an appeal before the Rent Control Tribunal which was dismissed on 22.9.1998. Thereafter he filed a second appeal which was dismissed by the Delhi High Court on 31.1.2000. Against that order he filed an SLP in this Court which was dismissed as withdrawn by order dated 8.12.2000. He then filed a Review Petition before the Delhi High Court which was dismissed on 9.2.2001. Against that order the appellant filed another SLP in this Court which was dismissed on 9.4.2001. By that order he was directed to vacate the premises and handed over physical possession to the landlord on or before 31.10.2001 subject to the usual undertaking to be filed within four weeks. However, the appellant did not file the undertaking.


In execution proceedings the appellant filed an objection on 16.3.2001 which was rejected by the Executing Court on 14.9.2001. Against the order dated 14.9.2001 the appellant filed an appeal which was dismissed as withdrawn on 1.11.2001. He filed a fresh objection on 8.11.2001 before the Executing Court which was rejected on 5.7.2002. Against that order he filed a First Appeal before the Rent Control Tribunal which was dismissed on 20.7.2002. Against the order of the Rent Control Tribunal he filed a Second Appeal before the Delhi High Court which was dismissed on 10.9.2002 by the impugned judgment. Thereafter he filed the present appeal before us.

It was submitted before us by the learned counsel for the appellant that the eviction decree was in respect of the second floor of the property in question, and possession of the second floor had been handed over to the landlord in pursuance of the eviction decree, but the third floor was an independent premises for which no order of eviction had been passed.


The High Court has dealt with this aspect and has observed that some unauthorized construction had been made by the appellant on the open area above the second floor of premises no.13/46, Scindia House, New Delhi and this unauthorized construction cannot be said to be an independent flat.

Before the Rent Control Tribunal it had been submitted by the appellant that the premises which is still in his possession is flat no.14A which is not a part of premises no.13/46, Scindia House, New Delhi. However, this plea had been negatived by the order of the Rent Control Tribunal dated 20.7.2002 after a detailed discussion. It was observed in the said order that flat no.14A is a part of the tenanted premises and not a separate accommodation. The High Court in the impugned judgment has observed that this is a question of fact and cannot be gone into in Second Appeal. We agree with this view taken by the High Court.

It is evident that frivolous objections have been filed in the execution case which is an abuse of the process of the Court and a flagrant violation of the eviction decree against the appellant against which Appeals had been rejected and even SLP in this Court was dismissed.

It is evident that after the first round of litigation was over the tenant started a second round of litigation on frivolous grounds which were a flagrant abuse of the Court. This is a practice which has become widespread, and which the Court cannot approve off, otherwise no judgment will ever attain finality.

Hence, we dismiss this appeal and impose a cost of Rs.10,000/- (Rupees Ten Thousand only) on the appellant which shall be paid to the respondent within two months from today. The appellant shall also hand over the premises in question, which is in his possession, to the landlord within three months from today failing which he will be evicted by police force.

...............................J.
(Markandey Katju)


...............................J.
(H.L. Dattu)
New Delhi;
April 30, 2009

all the ingredients of commission of an offence U/s 138 NI Act must be satisfied.

CRIMINAL APPEAL NO. 913 OF 2009 [Arising out of SLP (Crl.) No. 8059 of 2007]
Raj Kumar Khurana Versus State of (NCT of Delhi) and Anr.

Whether return of a cheque by the bank on the ground that it was reported lost by the drawer would attract the penal provisions contained in Section 138 of the Negotiable Instruments Act, 1881 (for short “the Act”)

A bare perusal of the section 138 of N. I. Act would clearly go to show that by reason thereof a legal fiction has been created. A legal fiction, as is well known, although is required to be given full effect, has its own limitations. It cannot be taken recourse to for any purpose other than the one mentioned in the statute itself.

The court must be satisfied that all the ingredients of commission of an offence under the said provision have been complied with.

The parameters for invoking the provisions of Section 138 of the Act, thus, being limited, we are of the opinion that refusal on the part of the bank to honour the cheque would not bring the matter within the mischief of the provisions of Section 138 of the Act.

Indian Domestic Arbitration: A practical approach

Arbitration is a method of adjudication of dispute(s) / difference(s) between the parties by non-judicial process wherein arbitrator(s)/umpire(s) is appointed by the parties themselves under a contract whereby the parties agree for adjudication of such dispute(s)/difference(s) by way of arbitration proceedings

In India, laws/rules that govern the arbitration process are laid down in Arbitration and Conciliation Act, 1996. But the act itself does not give any right to any party unless parties have entered into an arbitration agreement/contract for adjudication of dispute(s)/difference(s) by way of arbitration. Section 2(1) (b) of the act says that an arbitration agreement means an agreement referred to in section 7. Section 7(1) further states that an arbitration agreement means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. The act does not prescribe any formal form for arbitration agreement. It says that “an arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement” like any other agreement- Section 7(2). But an arbitration agreement shall be in writing - Section 7(3). Here the term “writing” has special meaning that has been clarified in sub-section 4 of section 7 i.e.-
(4) An arbitration agreement is in writing if it is contained in
a) a document signed by the parties;
b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or
c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

“Other means of telecommunication” indicates that a record of the agreement by exchanging e-mails may also be taken into account since as per the Law Encyclopedia (applicable to United States law) telecommunication means the transmission of words, sounds, images, or data in the form of electronic or electromagnetic signals or impulses. Section 7 (5) further clarifies that the reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

Section 2(1) (a) of the act says that arbitration means any arbitration whether or not administered by permanent arbitral institution. Thus it is clear from the definition that the act recognizes every type of arbitration whether it is institutional or non-institutional. Institutional arbitration means an arbitration process conducted by an institute; whether it is permanent or not; for adjudication of dispute(s) / difference(s) between the parties following rules of proceeding already framed by the parties themselves, failing which its own rules after obtaining the consent of the parties to such rules at a preliminary meeting in arbitration proceeding. Non-institutional arbitration means an arbitration process conducted by a arbitral tribunal other than institute for adjudication of dispute(s) / difference(s) between the parties following rules of proceeding already framed by the parties themselves, failing which its own rules after obtaining the consent of the parties in this regard at a preliminary meeting in arbitration proceeding.

Section 2(1) (h) party means a party to an arbitration agreement. This definition is not an expressed one. It is an implied definition as it has not been clarified who can be a party to an arbitration agreement. Here the term “party” covers a living person competent to enter into an agreement/contract and juristic person as well since juristic person may also be a party to an agreement/contract after fulfilling the certain legal formalities. Thus here party means a person competent to enter into a contract as per Indian Contract Act.

Section 2 (1) (e) of the act defines arbitral tribunal. It says “Arbitral tribunal means a sole arbitrator or a panel of arbitrators.” Where arbitral tribunal is a panel of arbitrators; “the parties are free to determine the number of arbitrators, provided that such number shall not be an even number”-Section 10(1) of the act. Failing the determination of number of arbitrators, the arbitral tribunal shall consist of a sole arbitrator- Section 10 (2) of the act.

To be an arbitrator, no formal qualification has been prescribed in the act. Even nationality is also no bar. Parties have been given full authority to determine the qualification of the arbitrator. Section 11 (1) of the act says that a person of any nationality may be an arbitrator, unless otherwise agreed by the parties. It is the parties who have to determine the qualification of the arbitrator keeping in mind the nature of the dispute(s)/difference(s) that has arisen or may arise between them. Parties may agree upon the qualification at very initial stage when they enter into an arbitration contract/clause or after dispute(s)/difference(s) arose if earlier has not been agreed. It will be beneficial for the parties themselves to determine the qualification otherwise decision of the arbitrator i.e. arbitral award may be set aside where the adjudication of such dispute(s) / difference(s) requires a person having a technical knowledge.

Appointment of arbitrator: Priority has been given to the procedure framed by the parties for appointing the arbitrator(s). Section 11(2) of the act says that the parties are free to agree on a procedure for appointing the arbitrator(s). Where a party (ies) fails to act as required under that procedure, appointment of arbitrator(s) can be secured by taking recourse to “other means” if arbitration agreement/clause provides such “other means” for securing the appointment of arbitrator(s) Section 11(6)(a). The term “other means” has not been define anywhere in the act. In case arbitration agreement does not provide such “other means” for securing the appointment, aggrieved party (ies) may request the Chief Justice or any person or institution designated by him to take the necessary measure for securing the appointment Section 11(6)(a). Where, under an appointment procedure agreed upon by the parties, the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or a person, including an institution, fails to perform any function entrusted him or it under that procedure, a party may request the Chief Justice or any person or institution designated by him to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment Section 11(6)(b) & (c).

Section 11(5) provides both the procedure and limitation period if the parties have not agreed on a procedure for appointing the arbitrator(s) in arbitration with a sole arbitrator. It says that if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by the Chief Justice of any person or institution designated by him.

Section 11(3) provides only procedure with three arbitrators if the parties have not agreed on a procedure for appointing the arbitrator(s). It says that each party shall appoint one arbitrator, and the two appointed arbitrators, shall appoint the third arbitrator who shall act as the presiding arbitrator. Further Section 11(4) provides a limitation period for such appointment. It clarifies that if a party fails to appoint an arbitrator within thirty days from the receipt of a request to do so from the other party; or the two appointed arbitrators fail to agree on the third arbitrator within thirty days from the date of their appointment, the appointment shall be made upon request of a party, by the chief justice or any person or institution designated by him.

Section 11(7) provides that a decision of the Chief Justice or the person or institution designated by him is final on the matter entrusted by sub section (4) or sub section (5) or sub section (6) of Section 11 whereas sub section (10) of it clarifies that the Chief Justice may make such scheme as he may deem appropriate for dealing with such matters.

The Chief Justice or the person or institution designated by him, in appointing arbitrator, shall have due regaled to (a) qualifications required of the arbitrator by the agreement of the parties and (b) other considerations as are likely to secure the appointment of an independent and impartial arbitrator Section 11(8).

What will happen if more than one request has been made under sub section (4) or subsection (5) or sub section (6)to the Chief Justices of different High Courts or their designates ? Section 11(11) answer it. It says that the Chief Justice or his designate to whom the request has been first made under the relevant sub section shall alone be competent to decide on the request.

Section 11(12) (b) clarify the term “Chief Justice”. It says Where the matters referred to in sub sections (4 ), (5 ), (7 ), (8 ), and (10 ) arise in any other arbitration, the reference to Chief Justice in those sub sections shall he construed as a reference to the Chief Justice of the High Court within whose local limits the principal Civil Court referred to in clause (e) of sub section (1 ) of section 2 is situate and, where the High Court itself is the Court referred to in that clause, to the Chief justice of that High Court.

Primary Duties of arbitrator: Sec.2 (d)” "arbitral tribunal" means a sole arbitrator or a panel of arbitrators.” When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing [to the concern authority only] any circumstances likely to give rise to justifiable doubts as to his independence or impartiality: Section 12(1).

MODE OF COMMUNICATION: Arbitrator should inform the parties to arbitration agreement about his appointment as an arbitrator. Procedure for written communication is given in section 3 of the act. It gives freedom to parties to agree upon any procedure for written communication during the arbitration proceedings what they feel proper and speedy for adjudication of their dispute(s)/difference even through e-mails but mode of communication must provide a record of such communication. Failing any agreed communication procedure any written communication is deemed to have been received if it is delivered to the addressee personally or at his place of business, habitual residence or mailing address: Section 3(1)(a)

If none of the places of business, habitual residence or mailing address can be found after making a reasonable inquiry, a written communication is deemed to have been received if it is sent to the addressee’s last known place of business, habitual residence or mailing address by registered letter or by any other means which provides a record of the attempt to deliver it Section 3(1)(b). No substitute mode of service such as publication etc required.

The communication is deemed to have been received on the day it is so delivered Section 3(2).

Section 3(3) indicates that arbitrator is not a judicial authority so arbitration proceeding is not a judicial proceeding. It says “This section does not apply to written communications in respect of proceedings of any judicial authority” but it applies in arbitration proceedings. It confirms that arbitrator is not a judicial authority.

Duties of arbitrator: A & C Act 1996 imposes tremendous responsibilities upon Arbitral Tribunal to act in such a way that don’t give any rise to his independence or impartiality. When parties appear before the arbitrator in response of the notice, the arbitrator, from the time of his appointment and throughout the arbitral proceedings, shall, without delay, disclose to the parties in writing any circumstances referred to in sub section (1) of section 12 unless they have already been informed of them by him: Section 12(2).

Grounds for challenge for appointment of arbitrator: If a party becomes aware about circumstances that give rise to justifiable doubts as to arbitrator’s independence or impartiality, or missing of the qualifications agreed to by the parties as mentioned in section 12(3), the party has only recourse to it is, to challenge the appointment of arbitrator(s) before arbitrator itself.

A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reason, of which he becomes aware after the appointment has been made: Section 12(4)

Procedure for challenging an arbitrator: The parties are free to agree on a procedure for challenging an arbitrator: Section 13(1)

Failing any agreement on a procedure for challenging the arbitrator, a party who intends to challenge an arbitrator shall, within fifteen days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of any circumstances referred to in sub-section (3) of section 12, send a written statement of the reasons for the challenge to the arbitral tribunal: Section 13(2)

Unless the arbitrator challenged under sub section (2) withdraws from his office or the other party agrees to the challenge, the arbitral tribunal shall decide on the challenge: Section 13(3)

If a challenge under any procedure agreed upon by the parties or under the procedure under sub section (2) is not successful, the arbitral tribunal shall continue the arbitral proceedings and make an arbitral award: Section 13(4)

Power and duties of arbitrator: A & C Act 1996 imposes mandatory obligations on Arbitral Tribunal to follow and give due respect to the contents of the arbitration agreement. Whatever has been written in the arbitration agreement regarding procedure to be followed, documents to be used as evidence, mode of communications to be used, place of arbitration, language etc in arbitration proceedings, arbitral tribunal is bound to follow the contents of the arbitration agreement. The parties (in arbitration proceedings) shall be treated with equality and each party shall be given a full opportunity to present his case Sec 18.

The whole purpose of enacting the A & C Act 1996 is to remove technical difficulties; faced by the parties in the court proceedings, from arbitration proceedings. That is why sec 19(1) says that the arbitral tribunal shall not be bound by the Code of Civil Procedure, 1908 or the Indian Evidence Act, 1872. The parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting its proceedings Sec19 (2) but failing any agreement in this effect, the arbitral tribunal may conduct the proceedings in the manner it considers appropriate Sec19 (3).This power of the arbitral tribunal includes the power to determine the admissibility, relevance, materiality and weight of any evidence Sec 19(4). The tribunal should give reasons regarding the determination of admissibility, relevancy, materiality and weight of any evidence.

Section 16 of the act gives full competency to arbitral tribunal to rule on its own jurisdiction. ). But this competency is subject to courts’ supervision.

“Section 16-Competence of arbitral tribunal to rule on its jurisdiction.-
(1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,----
(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and
(b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.

(2) A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence; however, a party shall not be precluded from raising such a plea merely because that he has appointed, or participated in the appointment of, an arbitrator.

(3) A plea that the arbitral tribunal is exceeding the scope of its authority shall he raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings.

(4) The arbitral tribunal may, in either of the cases referred to in sub-section (2) or sub-section (3), admit a later plea if it considers the delay justified.

(5) The arbitral tribunal shall decide on a plea referred to in sub-section (2) or sub-section (3) and, where the arbitral tribunal takes a decision rejecting the plea, continue with the arbitral proceedings and make an arbitral award.

(6) A party aggrieved by such an arbitral award may make an application for setting aside such an arbitral award in accordance with section 34.”

Though the arbitral tribunal has been empowered to order interim measures but this power is subject to arbitration agreement. Section 17 says:
“17.Interim measures ordered by arbitral tribunal.-
(1) Unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party, order a party to take any interim measure of protection as the arbitral tribunal may consider necessary in respect of the subject matter of the dispute.

(2) the arbitral tribunal may require a party to provide appropriate security in connection with a measure ordered under sub-section (1)”

Thus from above discussion, one can easily understood that there is no codified rules that govern arbitration proceedings except mentioned in arbitration agreement/clause if any. It is, therefore, one should be very careful before entering into any arbitration agreement/ clause in any walk of life.

Summoning the arbitrator

Union Of India VS. Orient Engg. & Commercial Co. Ltd. & Anr.

Respondent No. 1 filed, under Order XVI Rules 1 and 2 read with s. 151, C.P.C., a list of witnesses to be summoned including the Arbitrator who made an award in a matter between the appellant and the respondent No. 1. The Registrar of the High Court in the routine course granted summons without satisfying himself as to the sufficiency of cause to summon the arbitrator as required under Order XVI Rule 3, C.P.C. An objection petition u/s. 151, C.P.C. filed before the learned Judge of the High Court against the orders of the Registrar was dismissed.

Allowing the appeal, the Court,

HELD : (1) It is not right that every one who is included in the witness list is automatically summoned, but the true rule is that if grounds are made out for summoning a witness, he will be called. The court must realise that its process should be used sparingly and after careful deliberation if the arbitrator should be brought into the witness box. If a party has a case of mala fides and makes out prima facie that it is not a frivolous charge or has other reasonably relevant matters to be brought out, the court may, in given circumstances, exercise its power to summon even an arbitrator because nobody is beyond the reach of truth or trial by court.

(2)Courts should bear in mind the reason behind s. 121 of the Evidence Act when invited to issue summons to an arbitrator. It will be very embarrassing and in many cases objectionable if every quasi-judicial authority or tribunal were put to the necessity of getting into the witness box and testify as to what weighed in his mind in reaching his verdict. The slightest attempt to get to the materials of his decision, to get back to, his mind and to examine him as to why and how he arrived at a particular decision should be immediately and ruthlessly excluded as unreasonable. When an arbitrator has given an award, if grounds justifying his being called as a witness are affirmatively made out, the court may exercise its powers-otherwise not.

In the instant case the court has not approached the question from the proper perspective and on the materials on record, there is no justification for the examination of the arbitrator.
Khub Lal v. Bishambhar Sahai A.I.R. 1925 Allahabad 103, approved.

[The Court left open to the High Court to issue-necessary Process on a fresh application stating why he wants to examine the arbitrator, if and when made by the respondent.]

Minority share holders can be throne out

In a far-reaching decision, a division bench of the Bombay High Court has endorsed a special resolution of a company to reduce the share capital of a company on the basis of the identity of the person holding the shares. Majority shareholders can now throw out minority shareholders by effect a reduction of the capital held by minority shareholders alone.

Normally a reduction of capital is effected uniformly across all shareholders – not in a manner that picks and chooses specific shareholders who would cease to be shareholders. Since the proposed resolution sought to throw out minority shareholders alone as a consequence of the proposed reduction, a single judge had ruled that the proposal was inequitable. The division bench dealt with an appeal against the judgement of the single judge.

The provisions of Sections 100 to 105 of the Companies Act, 1956 (“the Act”) deal with reduction of capital. If a company’s Articles of Association permit reduction, the company could pass a special resolution (75 per cent vote by shareholders present and voting at a general meeting) approving reduction of capital, and then seek a court’s approval to effect the reduction.

The law entitles creditors to object to the proposal under certain conditions – logical, because shareholders normally stand last in queue when a company is wound up, and a reduction puts them ahead of the creditors.

There are other provisions in the Act based on which a shareholder could be taken out of a company. The provisions Sections 391-394 of the Act entail propounding of a scheme of arrangement or compromise whereby rights and obligations of shareholders and creditors could be altered, adjusted and modified in an extraordinary or unusual manner. Such sche-mes of arrangement too are subject to sanction of the high court, and once approved would bind the world at large including those dissenting to the scheme. Section 395 expressly deals with having to buy out dissenting minority shareholders who do not agree to a scheme approved by the majority.

However, in the instant case, the company’s proposal to reduce capital was in effect a proposal to squeeze-out the shareholders other than the promoters and divest them of shareholding.

The promoters were able to comfortably pass the special resolution. In lieu of the reduction, such shareholders would of course be paid money in terms of a fair value to be computed, but these shareholders would lose their right to hold shares although they were not willing sellers.

The division bench has ruled that the “special resolution which proposes to wipe out a class of shareholders after paying them just compensation” is not unfair or inequitable.

“In our opinion, once it is established that non-promoter shareholders are being paid fair value of their shares, at no point of time it is even suggested by them that the amount that is being paid is any way less,” the court observed. That an overwhelming majority of the non-promoter shareholders voted in favour of the resolution too weighed with the court, which held that “the court will not be justified in withholding its sanction to the resolution.”

The judgement opens up several interesting possibilities and propositions in relation to shareholder rights in India. The company in question was not a listed company – it had already been delisted.

Listed companies would require stock exchange approval for reduction of capital under the listing agreement, and it is unlikely that stock exchanges would approve such a transaction. However, for an unlisted company, regardless of whether a company is a public company or a private company, shareholders rights can be impacted severely.

Private equity investors holding small stakes without serious rights could easily be thrown out by management using such resolutions. In family-run companies, a segment of the family that holds a minority stake could get thrown by the rest of the family. All that one would need is a special resolution.

The core business issue involved here is not about whe-ther the price paid for the shares would be fair, but whether an owner of shares in India has a vested right to keep his property, or whether other shareholders can force him to divest his property.

For details judgment mail me at minturaj@gmail.com

Whether the appellants can directly approach this Court under Article 136 of the Constitution, against the orders of the District Court,

these appeals give rise to the following two questions:

(i) Whether the appellants can directly approach this Court under
Article 136 of the Constitution, against the orders of the District
Court, without approaching the High Court?

(ii) Even if the answer to the first question is in the negative, whether
leave having been granted by this Court, these appeals should be
considered and decided on merits?

Re: Question No. (i):

We therefore reiterate that though the existence of an alternative remedy by itself will not take away the jurisdiction of this Court under Article 136, this Court would not grant leave and entertain appeals against orders/judgments/decrees of the district court or courts sub-ordinate thereto, if remedy by way of appeal or revision to the High Court or other court or forum is available.

Re: Question No. (ii)

It is now well settled that the discretionary power vested in this Court under article 136 continues even after granting leave. Therefore, on hearing an appeal by special leave, this Court may refuse to go into merits, or even if it goes into merits, merely declare the law and refuse to interfere if interests of justice and/or facts of the case do not call for interference. If this Court finds that leave ought not to have been granted and that no prejudice will be caused, it may reject the appeal by special leave, reserving liberty to the appellant to pursue the alternative remedy before the High Court or other appropriate forum. In extreme cases, this Court may even revoke the leave already granted.

Proof of travel not required for claiming LTA: SC

IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.993 OF 2005
COMMISSIONER OF INCOME TAX & ANR. ...APPELLANT (S)
VERSUS
M/S LARSEN & TOUBRO LTD. ...RESPONDENT(S)
WITH
CIVIL APPEAL NO. 992 OF 2005
O R D E R
A short question which arises for determination in these Civil Appeal(s) is –
whether the assessee(s) was under statutory obligation under Income Tax Act, 1961, and/or
the Rules to collect evidence to show that its employee(s) had actually utilized the amount(s)
paid towards Leave Travel Concession(s)/Conveyance Allowance?

It may be noted that the beneficiary of exemption under Section 10(5) is an
individual employee. There is no circular of Central Board of Direct Taxes (CBDT) requiring the employer under Section 192 to collect and examine the supporting evidence to the Declaration to be submitted by an employee(s).
For the above reasons there is no merit in the Civil Appeals and the same are
dismissed with no order as to costs.
....................J.
[ S.H. KAPADIA ]
New Delhi, ....................J
January 21, 2009 [ AFTAB ALAM ]

beyond the reference

If the arbitrator decides a dispute which is beyond the scope of his reference or beyond the subject-matter of the reference or he makes the award disregarding the terms of reference or the arbitration agreement or terms of the contract, it would be a jurisdictional error beyond the scope of reference; he cannot clothe himself to decide conclusively that dispute as it is an error of jurisdiction which requires to be ultimately decided by the Court.

Beyond the scope of reference

If the arbitrator decides a dispute which is beyond the scope of his reference or beyond the subject matter of the reference or he makes the award disregarding the terms of reference or the arbitration agreement or terms of the contract, it would jurisdictional error beyond the scope of reference, he cannot clothe himself to decide conclusively that dispute as it is an error of jurisdiction which requires to be ultimately decided by the court

territorial jurisdiction issue

Both the appellant Board, having its base and operation at Jaipur and the respondent Company, having its registered office and manufacturing unit at Calcutta entered into an agreement having following clause:
"30.....The contract shall for all purposes be construed according to the laws of India and subject to jurisdiction of only at Jaipur in Rajasthan Courts only..........."
Somehow the disputes arose between the parties. The respondent company approcached the Hon'ble High Court at Calcutta. Somehow matter came before Hon'ble Supreme Court. Hon'ble Court referring its earlier judgments confirm the view expressed in Hanil Era Textiles Ltd. v. Puromatic Filters (P) Ltd. [(2004) 4 SCC 671], it was held by this Court that where two or more courts have jurisdiction under the Code, it is permissible to have an agreement between the parties restricting the place of suing to any one of them and if such restriction is placed in the agreement, the same cannot be said to be contrary to public policy and does not contravene Section 28 of the Contract Act. It was however, made clear that such restriction cannot be made and the parties cannot by agreement confer jurisdiction on a court which otherwise it does not possess under the Code.