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IN RE: VALAYA CLOATHING PRIVATE LIMITED & OTHERS (COMPANY LAW BOARD)

DECIDED ON: 15-10-2013

CASE IN BRIEF:Section 8 of Arbitration & Conciliation Act, 1996 read with Sections 397 & 398 of Companies Act, 1956 - Disputes relating to management of the company and also shareholders agreement-whether to be referred to arbitration- Held, No.

FACTS: The Petitioner is an investor and had invested a sum of Rs. 2,55,75,000/- towards his shareholding in the Company (“Company or Respondents”), in the year 2006. When the Petitioner made investment in the company, it was making considerable profits, which made him believe that the invested money would not be misappropriated by the management for their own use.

Later, the profit making company started making losses, and the Company was also not providing any information to the petitioner relating to any such losses. The petitioner alleged that the company was siphoning off the funds for purchasing luxury cars from the funds required to run the company. Later the petitioner also alleged that the company has never given any dividend to the petitioners. Therefore, the Petitioner has approached the Company Law Board (“CLB”) with the present petition.

On the other hand, the respondents filed an application before the CLB praying for referring the parties for arbitration as per the arbitration clause present in the shareholders Agreement and the share subscription Agreement entered into with the petitioners.

DECISION: Application filed by the respondents dismissed.

REASONS FOR DISMISSAL OF THE APPLICATION

The CLB Tribunal dismissed the application filed by the company on the following grounds:

  1. The grievances of the petitioners are not only related to subscription and shareholders Agreement, but also related to mismanagement taken place in the company.

  2. It is apparent on the record that the company had been running in losses from the year 2010, and the company was also not properly maintaining the register of the company i.e, stock records of the company.

  3. The company was making profits in the year 2006 when the investor invested around Rs. 2.5 crores in the company, but thereafter the company started showing losses from the year 2010 onwards.

The Bench made a proposal to provide an exit to the investors who invested substantial money in the company, but the respondent counsel replied that it could not do so as the company was making losses.

Hence, it is clear that arbitration clause is there to deal with any dispute that arises in relation to subscription and shareholders Agreement clauses, but as to mismanagement of the company is concerned, the tribunal will get jurisdiction to deal with that issue as well as the issue connected with the arbitration clause.

Therefore, the CLB Tribunal was of the view that the application was of no merits as the company petition discloses issues other than issues covered under subscription and shareholders Agreement.

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