SUNAIR HOTEL LIMITED Vs. UNION OF INDIA

JUDGEMENT

(1.) The appellants challenge the order dated 21/08/2000 passed by the Company Law Board, Principal Bench, New Delhi dismissing an application filed by the appellants under Section 8 of the Arbitration and Conciliation Act, 1996 (hereinafter referred as the Act) on the ground that the said application was filed later than when submitting their first statement on the substance of the dispute. The question raised in this appeal relates to the understanding and interpretation of Section 8 of the Act.

(2.) According to the averments in this appeal, M/s V.L.S. Finance Limited (respondent No. 2) entered into an Agreement/Memorandum of Understanding with M/s. Sunair Hotels Limited (Appellant No. 1) on 11/03/1995 for providing financial assistance to the appellants to construct a hotel on the site allotted to the appellants by the New Delhi Municipal Committee. Clause 12 of the said agreement provided that in the event of any dispute, the matter would be adjudicated by referring the same to arbitration. The appellants fulfilled their part of the obligations under the agreement but respondent No. 2 failed to fulfill its part of the obligations. It is alleged that instead of fulfilling its obligations, respondent No. 2 started sabotaging the project and even wrote numerous communications to various organizations prejudicial to the interest of the project. In terms of the agreement, respondent No. 2 had given Rs. 10 crores as a security deposit to the appellant company. It was stipulated in the agreement that in the event of the respondent's failure to perform its obligations, the amount of security deposit shall stand forfeited. Apprehending forfeiture of the security deposit, respondent No. 2 filed a petition (CP No. 45/98) under Sections 250, 377 and 378 of the Companies Act, 1956 before the Company Law Board alleging acts of oppression and mismanagement in the affairs of Sunair Hotels Limited (Appellant No. 1). The main allegation related to irregular and illegal allotment of shares stated to have been made by the appellants to their own group in violation of the provisions of the Companies Act. When the said company petition came up for hearing on 9/09/1998 the Company Law Board passed an ex-parte interim order against the respondents therein (appellants herein) and the company petition stood adjourned to 23/09/1998 for appearance of the appellants. On 23/09/1998 the appellants filed reply to the company petition along with the prayer for vacating the ex-parte interim order. In the reply, the appellants specifically stated that the petition before the Company Law Board was not maintainable in view of the arbitration clause in the agreement. On the first date of hearing i.e. 23/09/1998 instead of hearing the matter the Company Law Board suggested to the parties to try and settle the disputes amicably and the case was adjourned to 9/10/1998. Thereafter the company petition was adjourned from time to time without any effective hearing . In the meanwhile on 23/02/1999 the appellants filed an application (CA 63/99) under Section 8 of the Act praying for referring the disputes to arbitration. Respondent No. 2 filed reply to the said application contending that the arbitration clause was not operative in a case of mismanagement of the affairs of the company. The appellants, filed a rejoinder to the said reply. However, the said application (CA 63/99) was not heard till 17/08/2000 in view of the filing of an agreement of settlement dated 28/07/1999 wherein it was agreed that respondent No. 2 would pay the first instalment of Rs. 6 crores on 1/09/1999 and the second instalment of Rs. 13 crores on 31/05/2000. Since respondent No. 2 failed to make payments even in terms of the said agreement of settlement dated 28/07/1999, there could not be any compromise between the parties and the Company Law Board proceeded to hear the matter. The appellants' application under Section 8 of the Act and their objections regarding maintainability of the company petition were heard by the Company Law Board on 17/08/2000 and as per the impugned order dated 21/08/2000, the Company Law Board dismissed the application of the appellants on the ground of non-fulfillment of the requirements of Section 8 of the Act and posted the Company Petition for hearing on 24th and 25/08/2000.

(3.) Being aggrieved by the impugned order dated 21/08/2000 of the Company Law Board, the appellants have filed this appeal. According to the appellants, the Company Law Board erred in holding that the disputes between the parties are not liable to be referred to arbitration as stipulated in Clause 12 of the Agreement. It is stated that the Company Law Board erred in not appreciating that on 26/12/1998 the appellants had issued a notice to respondent No. 2 naming three arbitrators and that the said notice was duly acknowledged by respondent No. 2 vide its letter dated 24/11/1998. It is contended that the issuance of the said notice by the appellants and its acceptance by respondent No. 2 amounted to commencement of arbitration proceedings and thereafter Company Law Board had no jurisdiction to proceed with the company petition filed by respondent No. 2. It is also contended that the Company Law Board erred in not appreciating that the appellants had raised the objection regarding jurisdiction on the first date of hearing itself i.e. 23/09/1998 and that in the reply filed before the Company Law Board, the appellants had referred to the arbitration clause and had submitted that the dispute ought to be referred to arbitration. According to the appellants, the statements of the appellants in the said reply substantially fulfilled the requirements of Section 8 of the Act. It is further contended that the law does not stipulate that a formal application is required for referring the matter to arbitration. The appellants have raised several other contentions also but it is not necessary to refer, to them for deciding the issue raised in this appeal.