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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 Lettuce
were illegal and was in breach of their respective employment contracts and ESOP
policies.
The applicants submits that Coriander and Lettuce were the first employees of
ABPL. They were commerce graduates and they established the business in India
by 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 brand
name 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 and
Lettuce had deep knowledge about Indian markets they fervently opposed
complete conversion. They anticipated that the consumers would not accept any
other 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 to
this 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 under
the 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 very
evident 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 and
therefore 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 to
Company Law Board praying for necessary action / relief against cases of
oppression and mismanagement. It is mentioned in paragraph number 3 of the
statement 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.
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 than
10% 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 dispute
relating 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 the
jurisdiction of the CLB in disputes relating to oppression and mismanagement.
Section 402 provides for the various kinds of reliefs that can be granted by the
CLB.

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 being
conducted in a manner prejudicial to public interest or in a manner oppressive to
any member or members. Likewise, the cause of action with respect to
mismanagement 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 that
to 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 is
likely 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 such
order 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 as
it 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 the
legislature 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 dispute
but 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 the
Companies Act, containing eight chapters and running from section 146 to 423, is
with respect to the management and administration of a company containing
provisions as to various aspects of corporate management and administration of a
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 a
company".

The High Court of Calcutta in Clive Mills Co. Ltd, (1964) 34 Com Cases
731, has held that in an application under sections 397 and 398 where fraud,
mismanagement, misappropriation or other improper conduct is alleged, full
particulars 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 Companies
Act, 1956, the Honble High Court of Bombay in Bhalchandra Dharmajee Vs.
Alcock, Ashdown and Co.Ltd reported in 1972 (42) CC 190 was pleased to
observe 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 which
is not prejudicial to public interest. The element of public interest enters into the
management of the companies after 1963. The modern corporation has become the
accepted 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 the
economic 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 in
its stability and efficiency as an economic institution. The element of public
interest also arises from the responsibility for ensuring a minimum wage to the
numerous 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 employment
and 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 the
employees. This, in my opinion, is the requirement of section 397 and 398 of the
Companies 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 has
acquired experience and expertise in manufacture and supply of structurals and in
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 case
of 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 investigation
ought 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 a
conclusion 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 company
and also to make the necessary investigation referred to herein above.


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

The respondents in this case contends that as franchise agreements was subject to
arbitration 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 and
stakes 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 Company
Law Board/National Company Law Tribunal or the Company Court. Presence of
arbitration clause in an agreement, or for that matter an award, the courts
jurisdiction under ss.397 and 398 of the Companies Act, 1956, cannot stand
fettered On 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 such
as s.402.
1



CLB is the creature of a statute and has only such powers that are conferred on it
by 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). Further
CLB is deemed to be a civil court for the purposes of section 195 and chapter 26 of

1
Manavendra Ckhitnis and another Vs. Leela Chitnis Studios P.Ltd. and others, (1985) 58 Com Cases 113,
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 a
matter 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 are
the 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 is
clear 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 there
would be no limitation or restriction on such power that the same should be
exercised 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 application
under 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 or
oppression, 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 of
association 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 petition
under 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

2
Bennet & Coleman & Co v. UOI (1977) 47 Comp Cas 92 (Bom).
3
Surendara Kumar Dhawan and another v/s R.Vir and others (1977) 47 Com Cases 277
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 398
of 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 sections
397 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 can
possibly give relief to the petitioner under sections 397 and 398 or pass any order
under section 402 or section 403.
4



In Sudarshan Chopra's case cited supra, the Punjab and Haryana High Court had
held 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 of
Section 402 of the Companies Act can proceed with the matter notwithstanding the
arbitration clause.

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


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