jurisdiction of CLB

8/11/2019 jurisdiction of CLB

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ARGUMENTS ADVANCED

Whether the rights of Coriander and Lettuce were infringed under section 397 and

398 of the Indian Companies Act, 1956.

The applicants contends that the grounds of termination of Coriander and Lettucewere illegal and was in breach of their respective employment contracts and ESOPpolicies.

The applicants submits that Coriander and Lettuce were the first employees of

ABPL. They were commerce graduates and they established the business in Indiaby 2010 under the brand name amaze burgers which was known as one of the

most popular food joints in India. Coriander and Lettuce put in a lot of hard work

and efforts so that ABPL could reach to such levels. In 2012, ABI announced that

is being taken over by CBI. According to the terms of takeover, the ABI

franchisees all over the world were supposed to be re-branded under the brandname of CBI i.e. Craze Burgers and instead of ABIs ingredients and recipes,they will use CBIs ingredients and recipes.ABI informed ABPL, Coriander and

Lettuce that the franchisees in India will be taken over by CBI. As Coriander andLettuce had deep knowledge about Indian markets they fervently opposed

complete conversion. They anticipated that the consumers would not accept anyother brand other than amaze burgers and the entire market in India will fail.

Therefore, they refused to accept to take over the management of CBI and due tothis some differences arose and they were terminated on 30.3.2013 by CBI and the

notice was given to ABPL. Although it is given in the facts of the case that underthe employment agreement, ABI had reserved the right to terminate at will but a

notice of 60 days should be given along with the salary. Therefore, it is veryevident from the facts of the case itself that the termination of Coriander and

Lettuce was on malafide grounds as the biggest competitor of CBI was ABI andtherefore they wanted to take over it so that they may have monopoly in the

market.

Section 399 of the Companies Act, 1956 states that a person holding not less than

10% of the issued share capital of the Company or who constitutes not less than

one-tenth of the total number of members of a company is entitled to applying toCompany Law Board praying for necessary action / relief against cases of

oppression and mismanagement. It is mentioned in paragraph number 3 of thestatement of facts that in about May 2011, both Coriander and Lettuce were

respectively granted ESOPs worth 5.5% and 4.6% of the total paid up share capital

of ABPL.


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So Coriander and Lettuce jointly hold 10.1% of the total paid up share capital of

ABPL. Therefore, it is clear that both Coriander and Lettuce jointly hold more than10% of the total paid up share capital of their Company, thus making them eligible

for applying to Company Law Board for relief under Section 397/398 of the

Companies Act, 1956.

Dispute relating to oppression is covered under section 397 of the Act and disputerelating to mismanagement is covered under 398 of the Act.

The dispute

resolution machinery is the CLB which is a special authority constituted under

section 10E of the Companies Act. Section 399 sets out the eligibility criteria,

based on numbers and shareholding percentage, for a complainant to invoke thejurisdiction of the CLB in disputes relating to oppression and mismanagement.

Section 402 provides for the various kinds of reliefs that can be granted by theCLB.

The cause of action for an aggrieved member to lodge a complaint with CLB, with

respect to oppression, under section 397 is that the affairs of the company are beingconducted in a manner prejudicial to public interest or in a manner oppressive to

any member or members. Likewise, the cause of action with respect tomismanagement under section 398 is (i) that the affairs of the company are being

conducted in a manner prejudicial to public interest or in a manner prejudicial thatto the interests of the company or (ii) a material change has taken place in the

management or control of the company, and that by reason of such change, it islikely that the affairs of the company will be conducted in a manner prejudicial to

public interest or in a manner prejudicial to the interests of the company.

The CLB's duty, when a petition under section 397 is submitted, is to make suchorder as it thinks fit to bring to an end the matters complained of. Likewise, the

CLB's duty when a petition under section 398 is submitted is to make such order asit thinks fit to bring to an end or prevent the matters complained of or apprehended.

It is apparent from the language used in sections 397 and 398 that what thelegislature intended to remedy is "disputes relating to the affairs of the company"

that may take colours of either oppression of members or mismanagement of the

company. Thus the dispute complained of is not of a general commercial disputebut a dispute relating to the management of the company. This distinction is crucial

because arbitration, in general, provides remedy for resolving commercial disputes

and not any specific disputes dealt with in any special statutes. Part VI of theCompanies Act, containing eight chapters and running from section 146 to 423, is

with respect to the management and administration of a company containingprovisions as to various aspects of corporate management and administration of a


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company. Therefore, fairly it can be concluded that any dispute arising out of or

touching these provisions could well said to be dispute as to the "affairs of acompany".

The High Court of Calcutta inClive M il ls Co. Ltd, (1964) 34 Com Cases731,

has held thatin an application under sections 397 and 398 where fraud,

mismanagement, misappropriation or other improper conduct is alleged, fullparticulars must be set out in order to enable the party charged to understand what

he is charged with and also to enable him to answer such charges.

Dealing with the issue of public interest under section 397/398 of the Companies

Act, 1956 and the requirement on the part of the Company Law Board to look into

many issues while entertaining a petition under section 397/398 of the CompaniesAct, 1956, the Honble High Court of Bombay in Bhalchandra Dharmajee Vs.

Alcock, Ashdown and Co.Ltd reported in 1972 (42) CC 190 was pleased toobserve as follows: (6) After the amendment of sections 397 and 398 of the

Companies Act by sections 10 and 11 of the Companies (Amendment) Act (LIII of

1963), it would appear that the affairs of the company have to be conducted not

only in the best interest of its members for their profit but also in a manner whichis not prejudicial to public interest. The element of public interest enters into the

management of the companies after 1963. The modern corporation has become theaccepted instrument of social policy, because it affects a large part of the economic

life of the community. It has become an instrument for the improvement of theeconomic standards of the people and for economic growth of the nation. Society

depends for some of its needs on corporate enterprise. It has therefore an interest inits stability and efficiency as an economic institution. The element of public

interest also arises from the responsibility for ensuring a minimum wage to thenumerous employees in the corporate sector. It is necessary to see that people who

put their labour and lives into a concern get fair wages, continuity of employmentand a recognition of their right to their jobs where they have trained themselves to

highly skilled and specialised work. In deciding whether the court should wind up

a company or change its management the court must take into consideration not

only the interest of the shareholders and creditors but also

public interest in the shape of the need of the community and the interest of theemployees. This, in my opinion, is the requirement of section 397 and 398 of theCompanies Act. This country has been spending vast sums of money in promoting

new industries in public and private sectors in the interest of the economic progress

of the country and improvement of living standards. In face of this, it would appear

to be improper to destroy a company which has worked for nearly 87 years and hasacquired experience and expertise in manufacture and supply of structurals and in


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boat building and ship repairing. At the same time the company cannot be kept

alive so as to incur further liabilities and to diminish the dividend payable in caseof winding up to the existing creditors or the shareholders. Their interests also have

not to be sacrificed. It is therefore necessary that pending the hearing and final

disposal of these petitions, an arrangement ought to be made for the collection,realisation, preservation and maintenance of those assets of the company which are

in the possession of the company. It is also necessary that an investigationought to be made into the affairs of the company to find out if it is possible to

resuscitate the company. It is only after such investigation that one can come to aconclusion as to whether the company ought to be wound up or whether it ought to

be kept alive. In view of this position, I think the best order to make is to appoint a

special officer to collect, realise, preserve and maintain the assets of the companyand also to make the necessary investigation referred to herein above.

Whether the Company Law Board has jurisdiction in this matter as theemployment agreement was subject to arbitration

The respondents in this case contends that as franchise agreements was subject toarbitration the Company Law Board has no jurisdiction over the issue. When there

is a dispute between the company and other, between the company and its

shareholder and between two companies, then the issue will be complicated andstakes will be high very often. The parties in a company dispute may require

immediate orders having the binding nature. The companies can refer a matter to

an Arbitrator but the arbitration clause cannot oust the jurisdiction of CompanyLaw Board/National Company Law Tribunal or the Company Court. Presence of

arbitration clause in an agreement, or for that matter an award, the courtsjurisdiction under ss.397 and 398 of the Companies Act, 1956, cannot stand

fetteredOn the other hand, the matter which can form the subject-matter of a

petition under ss.397 and 398 cannot be the subject-matter of arbitration, for an

arbitrator can have no powers such as are conferred on the court by sections suchas s.402.1

CLB is the creature of a statute and has only such powers that are conferred on itby the statute which created it. In other words it has limited powers. Certain

powers of the civil court are conferred on it by virtue of section 10E (4C). FurtherCLB is deemed to be a civil court for the purposes of section 195 and chapter 26 of

1Manavendra Ckhitnis and another Vs. Leela Chitnis Studios P.Ltd. and others, (1985) 58 Com Cases 113,


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the Cr.P.C and every proceeding before it is deemed to be a judicial proceeding

within the meaning of sections 193 and 228 of the IPC.

The Company Law Board, however, exercises the powers conferred under the Act

or in any other statute which confers a power on the Board to adjudicate upon amatter entrusted to it under law or by the Central Government. Sub-section 4D of

section 10E and regulation 47 of the Company Law Board Regulations, 1991 arethe deeming clauses and treat the Board as a court for this limited purpose.

This issue came up before the Division Bench of the Bombay High Court in an

appeal preferred against the order passed by the Single Judge reconstituting the

board of the company passed under section 402. The Court held- The position isclear that while acting under sections 397 and 398 read with section 402 of the

Companies Act, the court has ample jurisdiction and very wide powers to pass

such orders and give such directions as it thinks fit to achieve the object and therewould be no limitation or restriction on such power that the same should beexercised subject to the other provisions of the act dealing with normal corporate

management or that such orders directions should be in accordance with such

provisions of the Act."2

Referring the issue of providing a arbitration clause between the company and

members and connecting the same to the right of the members to file an applicationunder section 397/398 of the Act, the High Court of Delhi held that the

shareholders of a company have a right to file a petition under section 397 or

section 398 of the Companies Act, 1956, for relief against mismanagement oroppression, if the provisions of section 399 are satisfied. Their right is a statutory

right which, by section 9, cannot be ousted by a provision in the articles ofassociation of the company. Any article providing that a difference between the

company and its directors or between the directors themselves or between any

members of the company or between the company and any person shall be referred

to arbitration cannot debar the jurisdiction of the court in the matter of a petitionunder section 397 or 398. The court will not stay a petition under section 397 and

398 on an application under section 397 or 398 on an application under section 34

of the Arbitration Act, 1940, based on the arbitration clause.3

On the same lines the High Court of Delhi observed that merely because there is

an article in the articles of association of the company to the effect that any dispute

2Bennet & Coleman & Co v. UOI (1977) 47 Comp Cas 92 (Bom).

3Surendara Kumar Dhawan and anotherv/sR.Vir and others(1977) 47 Com Cases 277


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between the company on the one hand and its members on the other will be

referred to arbitration, the court will not stay a petition under section 397 and 398of the Companies Act, 1956, for relief against mismanagement or oppression in the

affairs of a company. Such an article cannot be called into play for the purpose of

staying proceedings under section 397 or section 398. The provisions of sections397 and 398 and of section 434 give exclusive jurisdiction to the court and the

matters dealt with thereby cannot be referred to arbitration. No arbitrator canpossibly give relief to the petitioner under sections 397 and 398 or pass any order

under section 402 or section 403.4

In Sudarshan Chopra'scase cited supra, the Punjab and Haryana High Court hadheld that the jurisdiction of CLB under Sections 397 and 398 is not in any way

affected by the existence of arbitration clause and, therefore, the CLB which

exercises power under those Sections and passes orders as per the provisions ofSection 402 of the Companies Act can proceed with the matter notwithstanding thearbitration clause.

Whether the clauses in the franchise agreements are in violation of Section 3 of theCompetition Act

4O.P.Gupta Vs. Shiv General aFinance (P.) Ltd. and others, (1977) 47 Com Cases 279,

jurisdiction of CLB

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