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Globe Motors Ltd. Vs. Mehta Teja Singh and Co. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtDelhi High Court
Decided On
Case NumberFirst Appeal No. 53 of 1982
Judge
Reported in[1984]55CompCas445(Delhi); 24(1983)DLT214
ActsArbitration Act, 1940 - Sections 20; Limitation Act, 1908 - Article 137; Companies Act, 1956 - Sections 299
AppellantGlobe Motors Ltd.
RespondentMehta Teja Singh and Co.
Advocates: Mohinder Narain,; V.V. Shastri and; R.L. Gulati, Advs
Cases ReferredLiquidator v. P.A. Tendulker
Excerpt:
the case discussed the validity of the contract within the provisions of section 23 and 24 of the contract act, 1872, while the contract had resulted in loss to the company - the agreement was entered into by the directors of the company in their fiduciary capacity - it was held that the contract was vitiated due to the involvement of personal interest of the directors in the matter - thus the same was liable to be struck down and could not be sustained in law - - made the following observations, which were later on upheld by the house of lords :it is of the highest importance that it should be distinctly understood that it is the duty of directors of companies to use their best exertions for the benefit of those whose interests are committed to their charge, and that they are bound to.....rajindar sachar, j.(1) this is an appeal filed against the order of the learned single judge by which he allowed the application under section so of the arbitration act filed by the respondents. (2) the respondent's case was that an agreement had been entered into with the appellant company which is now under liquidation by means of an agreement dated 1-6-1967011 the terms mentioned therein. in the said agreement it was also stated that any dispute or difference arising in regard to any of the terms contained in the agreement, shall be settled in accordance with the provisions of the arbitration act. the application under section 20 of the arbitration act was filed in november, 197.3. (3) it may be noted that application for winding up of m/s globe. motors ltd. was moved in march, 1968.....
Judgment:

RaJindar Sachar, J.

(1) This is an appeal filed against the order of the learned single Judge by which he allowed the application under Section So of the Arbitration Act filed by the respondents.

(2) The respondent's case was that an agreement had been entered into with the appellant company which is now under liquidation by means of an agreement dated 1-6-1967011 the terms mentioned therein. In the said agreement it was also stated that any dispute or difference arising in regard to any of the terms contained in the agreement, shall be settled in accordance with the provisions of the Arbitration Act. The application under Section 20 of the Arbitration Act was filed in November, 197.3.

(3) It may be noted that application for winding up of M/s Globe. Motors Ltd. was moved in March, 1968 Globe motors was having one of its industrial units manufacturing steel under the name of Globe Steels. The agreement purports to appoint the respondents as distributors for the gale and marketing l/6th of the company's steel products. Objection was taken by the Official Liquidator on various grounds. Broadly the grounds raised were-(i) whether the application filed under Section 20 of the Arbitration Act was barred by limitation; (ii) whether the agreement dated 1-6-1967 was valid and the next question related to whether the agreement was vitiated on the grounds of fraud and being against the interest of the company. The learned single Judge found all the pleas against the appellant and in favor of the respondents, and has, thereforee, directed the matter to be referred to the arbitration. Hence the appeal by the Official Liquidator.

(4) The first contention raised by Mr. Andley the learned counsel for the appellant is that as the agreement was entered into on 1-6-1967 the application filed under Section 20 in November, 1973 is barred by time. It is common case that article 137 of the Schedule to Limitation Act 1963) which provides lor a period of 3 years is applicable to application filed under Section 20 of the Arbitration Act. Mr. Andley urges that the right to apply accrued when the first default took place in payment of the monthly payment of Rs. 10,000.00 in terms of Article IV(b) of the agreement and as admittedly company made no payment, limitation would start from August, 1967, and application had become barred by 1970. The learned single Judge however, has held that the firms' claim was repudiated only on 29-4-1971 thereforee, the period of three years is to be calculated from that date, and if that is done the application filed in November 1973 was within time, We deem it unnecessary to examine whether the right to apply accrued from the date of repudiation, namely, 29-4-1971 because even accepting the argument of Mr. Andley that the period was to be calculated and the right to apply accrued when the company defaulted in making payment of Rs. 10,000.00 monthly, it is evident that limitation would start from each default when it was committed. Thus for defaults committed for non-payment of monthly payments from October, 1970, would have to be treated within time as application was moved in November, 1973. The application for arbitration on the ground of limitation, thereforee, could not be thrown out for right to apply accrued for part of the claim only from October, 1970 onwards, which was within time. Of course it may have been open to the appellant to urge before the arbitrator that the claim of the respondents for a period prior to October, 1970 was barred by time. We decide nothing on this point because once it was held that the matter had to be referred to arbitration the other question, namely-whether any particular part of the claim is time barred or not, would evidently be a matter for the arbitrator to decide. We, thereforee, agree with the learned single Judge that the application was not time barred.

(5) The next contention of the appellant was that the agreement had not been put to the general body of the shareholders, and thereforee, it was not valid. The learned single Judge has, in our view, rightly rejected this contention. It is true that Mehta Harnam Singh with whom the agreement was entered into, was a Director of the Board of company. Section 299 of the Companies Act provides that every director of accompany who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the Board of Directors. Reference to the agreement and the resolution dated 1.5-6-1967 which was passed by the Board of Directors shows that when the Board approved the resolution in favor of the respondents, it was specifically noted that some of the Directors, mentioned therein, of the Company indicated their interest in the above arrangement and neither took part in this discussion or on the resolution. Amongst these the name of Harnam Singh is included. Mr. Andley of course seriously doubts whether any interest was disclosed and also castigates the manner in as much the five directors continued sitting in the meeting when the decision was taken. Be that as it may, the fact remains that interest in the agreement was disclosed by the Director. It is not, thereforee, possible to accept the argument that there was any violation of Section 299 of the Companies Act. The Board having thus approved the agreement, the same is not in any way invalid because there is no requirement of Jaw to place this agreement before the general body of the company. It has not been shown that the exercise of power by the Board of Directors in approving this agreement was in any way beyond the powers given to them under the Articles of Association.

(6) It was then sought to be contended that the agreement should have been put before the general body of shareholders, and attempt was made to invoke Section 294 which lays down that no coin any shall after the commencement of the Companies (Amendment) Act,1960, appoint a sole selling agent for any area for a term exceeding live years at a time-, and to Sub-section (2) which provides that the Board of Directors shall not appoint a sole selling agent for any area except subject to the condition that the appointment shall cease to be valid if it is not approved by the company in the first 'general meeting held after the date on which the appointment is made. This argument however, assures that the' arrangement which was approved by the Board on 15-0-1967 ami which ii recorded in the agreement of 1-6-191-17 was that of a sole selling agent. We however, cannot so read the said agreement. The agreement is straight forward appointment of the respondents as their distributors for the sale and marketing of the' company's steel products to the extent of 1/6111 of the total proceeds of the sale of products. No specific area is ear-marked fur the respondents in which the respondents could be shown to be the sole selling agents The learned Judge w-is, thereforee, right in his conclusion that the agreement did not .have to be put to the general body insetting the its confirmation. The more serious objection raised by Mr. Andley, counsel for the appellant is to the finding of the learned single Judge by which he rejected the argument that the agreement was vitiated because of the fraud or act of the Directors acting in a manner so patently against the benefit of the company. Now it is not disputed and in fact the learned single Judge accepts that the Directors have fiduciary duly to the company. The position of Directors in their relationship to the company is no longer in doubt. Directors are not only the agents but they arc in some sense and to some extent trustees or in the position of trustees......it is impossible now to dispute the position that they are in some sense trustees. That position having been established by a long series of cases (Vide Palmer's Company Precedents, 16th Edition, Part I, Page 561 to 564).

(7) The courts have been very jealous in seeing that the fiduciary relationship of the Directors with the Company is not abused. The Directors have been held to be trustees of title assets of the company and courts have directed them to reimburse the loss to the company where it was found that Directors had applied title Company's money in payment of an improper commission. title strictness with which the courts view the responsibility and the sacredness of the trust reposed in the Directors was emphasised long time back in Imperial Mercantile Cradi.t Assn. v. Coleman (1873) L.R.6 H.L. 189) In that case one Coleman broker and a Director of a financial company, had contracted to place a large amount of railway debentures for commission of 5 percent. He proposed that his company should undertake to place them for a commission of 1-1/2 percent to the company. He was held liable to account of 3-1/2 percent. In so deciding Malins, V.C. made the following observations, which were later on upheld by the House of Lords :-

'IT is of the highest importance that it should be distinctly understood that it is the duty of Directors of companies to use their best exertions for the benefit of those whose interests are committed to their charge, and that they are bound to disregard their own private interests whenever a regard to them conflicts with the proper discharge of such duty.'

These observations were reiterated with approval in R'gal v. Gulliver 1942 (1) All. E.R. 378. In that case an action was brought by the company against the defendants directors to recover from them the sums of money which were alleged to have been profits made by them improperly and against the interest of company. Viscount.Sankey, one of the law Lords accepted that the Directors were in a fiduciary position and their liability to account does not depend upon proof of male fide. In holding that the Directors were liable to account for title company the Court observed (p. 383 F) 'at all material times they were directors and in a fiduciary position, and they used and acted upon their exclusive knowledge acquired as such directors. They framed resolutions by which they made a profit for themselves. They sought no authority from the company to do so, and by reason of their position and actions they made large profits for which, in my view, they are liable to account to the company.' 'The courts in Scotland have treated directors as standing in a fiduciary relationship towards their company and, applying to the equitable principle have made them accountable for profits accruing to them in title course and by reason of their directorship. It will be sufficient to refer to Huntinglon Copper Co. v. Henderson, in which the Lord President cites with approval the following passage from the judgment of the Lord Ordinary:

'Whenever it can be shown that the trustee has so arranged matters as to obtain an advantage whether in money or money's worth to himself personally through the execution of his trust, he will not be permitted to retain, but be compelled to make it over to his constituent. ' (P. 389 A supra).

Thus it cannot be disputed that the fiduciary duties of directors are basically the same as those of other trustees and they are expected to display the utmost good faith towards the company whether their dealings are with the company or on behalf of the company. They should not use the company's money or other property or information or other matters in their possession in their capacity of directors, in order to gain any advantage to themselves at the expense of the company, and if they make any profit for themselves or cause any damage to the company, they will liable to make good the same to the company. Similar observations were made in the Report of the HighPowered Expert Committee on Companies and Mrtp Acts (1978) which succinctly expresses the legal position of the directors as follows:-

'DIRECtorSare appointed to act in the interests of the company and an important area of their legal responsibility stems from the law of trusts-they have a fiduciary relationship with the company. The duties arising from the relationship are well defined viz, to exercise their powers for the benefit of the company, to avoid a conflict of interests, and a duty not to restrict their right (by contract or otherwise) in freely and fully exercise their duties and powers. In addition to their fiduciary duties, directors also owe a duty of care to the company not to act negligently in the management of its affairs the standard being that of a reasonable man looking after his own affairs.'

(8) The learned judge in dealing with the aspect whether the company now represented by the Official Liquidator was entitled to avoid the agreement of 1-0-1967, has proceeded on the basis that the same could only be done if fraud in execution of this agreement was proved and further that the way this fraud is to be proved was in the same manner .and by the same test as in a civil suit. lt is for this reason that the learned Judge seems to have placed over-emphasis on the enumeration of particulars if plea of fraud was to be established. Apart from the fact that this position is not factually correct (as we shall show later) this approach under-estimates the importance of the relationship of the Directors with the company which being fiduciary has to be judged by the tests broadly laid down lor judging the conduct ofa trustee. In holding the director liable for misfeasai.re or having worked against the interest of the company it is not necessary that fraud in the strictest term has to be proved. 'Thus a (.director may be shown to be so placed and to have been so closely and so long associated personalty with the management of the company that he will be defined to be not merely cognizant of but liable for fraud in the conduct of'the business of'the company even though no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs of' the company even superficially If he decs so he could be held liable for dereliction of duties undertaken by him and compelled to make good the losses incurred by the company due to his neglect even of fraud . It is enough if his negligence is of such a character as to enable frauds to be committed and losses thereby incurred by the company'. (Vide Offici'al Liquidator v. P.A. Tendulker (1973) 43 Comp Cas 382,.

(9) A derivative action can be brought against directors who are in control of the company to compel such directors to account to the company for profits made by appropriating for themselves a business opportunity which the coin Amy would otherwise have enjoyed. (Vide Penington's Company Lnv 4th Edition, page 596).

(10) Gower in Company Law 3rd Edition page, 526 has noticed that because of the trustee like position of the directors a contract between the company with another firm of partnership of which one of the directors was a partner have been avoided at the instance of the company notwithstanding that its terms were perfectly fair and that in the words of Lord Granworth L.C. 'so strictly is this principle adhered to th;it no question is allowed to be raised as to the fairness or unfairness of a contract so entered into......'. Thus the contract Will be voidable at the instance of a company and any profits made by the Directors personally will be recoverable by the company (page 527 supra).

(11) Various remedies could be resorted to by the Company in case of a breach of duties by the Directors. Thus one of the remedies provided to the company is recession of a contract, another is accounting for profits. The liability of the Director may arise out of a contract made between a director and a company. In such a case accounting is a remedy additional to avoidance of contract and is normally available whether or not is there recession, (page 559 supra. Gower).

(12) A resume of the law would thus clearly show that no doubt the Companies Act does not forbid a contract being entered into by the company with a firm in which one of the Directors is a partners, it is also true that the respondent Director disclosed his interest in the agreement when the same was approved by the Board of Directors at its meeting held on 15-6-1967. But this fact by itself does not automatically prove that the arrangement which had been entered into by the company was not of such a nature which keeping in view the fiduciary relationship of Mehta Harnam Singh, a director of the company should not have been so entered into, thus giving a right to the company to avoid the contract and to ask for the recovery of the profits made by the Director. The test to be applied in the present case is-had the company been a going concern and had some payments in pursuance of this very agreement been made to the respondents could the company have asked for recession of the contract or in case any payments had been made to the respondent Harnam Singh and others, for the return of the same to the company. If the answer is in the affirmative, the claim of the appellant must succeed.

(13) We must now turn to the examination of the agreement to find out whether its terms were such which in the words of the Supreme Court would show that circumstances were such that there could be no other conclusion than that the same was arrived at because of the peculiar position, which the respondent as Director, enjoyed in tile cumpany.

(14) The first most important thing' to no' ice is that when the Board met on 15-6- 1967 at which it approved this arrangement it also approved two other agreements in which some other directors were partners. All title three agreements were of more or less identical nature.

(15) Resolution No. 22 approved the appointment of M/s.Parvinder Finance Corporation as the Distributors of l/6th of the products of Globe Steels. Narinder Singh Kohli one of the directors of the company was a partner in M/s. Parvinder Finance Corporation and was present at the said meeting.

(16) Resolution No. 30 approved the appointment of M/s. S.N.G. Agencies as distributors of l/16th of the products of globe steel. M/s. S.N.G. Agencies was a partnership firm in which -lr. C.L. Gulati, Mr, H.S. Saluja, Mr. K.R. Saluja, Mr. S.L. Saluja and Mr. Narinder Singh Kohli were partners. All of them were present at that time in the Board Meeting.

(17) Resolution No. 21 deals with title present case in which it approved the appointment of M/s, Teja Singh and Company as distributors turn l/6th of the products of M/s. Globe Steels, The partnership consisted of Mehta Harnam Singh and his two sons. Mehta Harnam Singh was a Director of the company and was present at the said Board meeting.

(18) It will thus be seen that out of 13 directors who attended the Board meeting on 15-6-1967) 6 of them were interested in three agreements which were approved by the Board on that day. Technically we may accept what is recorded in the minutes of the Board that the Directors had disclosed their interest in the agreement which was being approved and also did not take part in the discussion or voted on the resolution. Though thereforee, there may not be any technical objection to these resolutions yet we cannot overlook the patent incongruity of accepting that unbiased mind was brought to bear on the merits of these agreements when almost half of the Board was interested in one or the other agreement. In such a case the criticism that this was nothing but mutual backslapping to enrich themselves does not sound improbable. As Gower on Company Law in commenting on such kind of disclosures says-'in marked contrast with the basic equitable principle, the disclosure required is not to the general meeting but to the board. It hardly seems over-cynical to suggest that disclosure to one's cronies is a less effective restraint on self seeking than disclosures to those for whom one is a fiduciary. (Page 530)

(19) The learned single Judge was persuaded to accept the genuine ness of the agreement by holding that the respondent firm had injected Rs. 5 lakhs in the company at the time the contract was entered into, apparently suggesting that this was consideration for this agreement. A reference to the statement of Mr. Satinder Kohli, Chief Accountant of the company however, will show that this amount of Rs. 5 lakhs was in lieu of the transfer of shares from Parvinder Kohli to Mehta Harnam Singh and his sons. According to statement of this witness, out of the shares standing in the name of Parvinder Singh Kohli 1250 shares were transferred to Mehta Harnam Singh and another 1250 shares were transferred to Mr. Ravi Mehta S/o Mehta Harnam Singh and still another 2500 shares were transferred to Mr. Vijay Mehta another son of Harnam Singh. These shares were transferred in the month of February and March, 1967. This Rs. 5 lakhs, thereforee, represented amount for transfer of these shares. They had no relevancy to this agreement which was executed in June 1967. This money was not invested or loaned to the company, but was the price paid for purchase of shares. Though the attorney appearing for the respondents sought to suggest that these shares were transferred against the consent of the respondents and they had not even asked for it he had to soon resile and admit that not only Mehta Harnam Singh and his sons had accepted these shares and treated themselves as owners of these shares but had actually sold them to Mr. Mundra during the pendency of the winding up petition for about Rs. 3 lakhs. The attorney however, made a grievance that these Rs. 5 lakhs worth of shares were sold for Rs. 3 lakhs but soon had to admit that the other shareholders had to part with their shares at 20 and 25%of the face value whereas Mehta Harnam Singh etc.'s shares had been sold for over 60/o of the face value. Considering the penury condition of the company it cannot be said that the respondent did badly at this price. Finding by the learned single Judge, that there was a consideration of Rs. 5 lakhs for this agreement is not supported by the record.

(20) The learned single Judge has not accepted that the contract was without consideration. The learned Judge holds that it was a service contract for the purpose of employment to boost sales and because of this service there was a good consideration even to paying Rs. 1 lakh 20 thousand per annum as a minimum fee. Normally if a party undertakes to boost sales and use his expertise for this purpose on some minimum fee it is possible to say that there was a proper consideration for contract. But it was the Official Liquidator's case in reply to the application for arbitration that none of these agencies including the respondents had ever dealt with steel products or had any experience in the line and that this device was fraudulently and collusively adopted to siphon away the company's funds for the individual and personal benefits of the said directors, at a time when the company to their full knowledge was passing through a financial crisis beginning with July 1966. It was also stated that they had not rendered any service and the agreement had never been acted upon. Infact Shri B. K. Bcdi,the Chairman of the company who had negotiated the sales originally was unable to contradict that the plaintiff firm did not secure any business for the company. He also admitted that the firm was not associated with any other steel unit or any other manufacturing unit. He did not know that they had any experience as manufacturer. The control and the influence that these persons could exercise on the whole Board is apparent from hii admission that Directors Kirpa Ram Saluja, Narinder Singh Kohli and a few other directors were even on the Finance Committee of the company and this committee had favored the grant of selling agency to the respondent. Thus it is crystal clear that it is a case where the Board of 13 approved of these agreements, which granted the distribution rights of the company's steel products to 6 of themselves, of course after complying with the formality of disclosing their interest. Had the presence of Directors been the only objection but the terms on which the agreement was entered into showed some kind of fairness and business arrangement normally expected of an ordinary business man, it might have been still possible to uphold the agreement. But the terms incorporated in the agreement leave no manner of doubt that the only interest that was kept in view was the personal benefit and profit of these directors and that too at great cost and to the gross detriment of the interest of the company.

(21) Now the agreement by which the respondents were appointed distributors was for a period of 5 years. Under Article 2 of the agreement distributors were obliged to provide for the company the services of a selling organisation whose duties included to promote the sale of product and lo submit at regular intervals reports. Clause 4 of Article Ii is important and is reproduced :

'toreimburse the Company for the sale promotion expenses incurred by it on behalf of the Distributors in the promotion of the products of 'GLOBE STEELS'. The amount of such expenses shall be certified by the Governing Director and Chairman of the Company, Shri B. K. Bedi and shall be subject to the maximum of two percent of the one-sixth of the sales proceeds of the products of Globe Steels.'

Prima facie Article 2 read by itself may appear to show that some duties had been cast on the distributors under which some services were to be performed by them, they were even expected to bear some expenses and even reimburse the company for the sale promotion expenses incurred by it on behalf of distributors. But this impression is a deliberate illusion created to fag the whole issue; a reference to Article 4 of the agreement would immediately dispel it. Under Article 4 allegedly in consideration of the services defined in Article 2 the company was obligated to pay to the distributor a fee at the rate of 4.8% of l/6th of total proceeds of sale of products of Globe Steel through distributors or directly by the company, but if sale proceeds fall below 1 50 crores in any financial year a sum of Rs. 1.20 lakhs will be paid as a minimum fee in any financial year. Not only that the agreement is so heavily weighed one way in favor of the respondents that clause (b) of Article 4 lays down that the minimum fee of Rs. I lakh and 20 thousand shall be paid and allowed to the distributors in equal monthly Installments of Rs. 10,000/- each irrespective of the sales of each month. Here we thus have a situation where the company has agreed to pay Rs. 1 lakh 20 thousand as minimum fee irrespective of sale of even a rupee worth of product. What can be the possible justification for entering into such an unfair and one sided agreement. Apparently one may assume that it is for expenses incurred by the distributors under the agreement for sale promotion and running of offices etc. But this impression would be without taking into account the ingenuity of the Director respondent; as is to be found in terms incorporated in Article 4 of the agreement. By clause (2) of Article 4 the company is obligated to reimburse the distributors for all expenses incurred in the rendering of the services defined in Article Ii including those mentioned in clause 4 Article II. It will be appreciated that Article 2 was the one which obliged the distributors to incur certain expenses. But by clause (2) of Article 4 all this is washed off; the company is made liable to pay to the distributors for those expenses which it had undertaken to do by Article II. In short, the effect of clause (2) of Article Iv is the open unembarrassed taking over by the company of all the expenses which were to be incurred by the distributors. Nothing at all was to be spent by the distributors. There was thus nothing that the distributors were to spend for which they were not immediately to be reimbursed by the company. Though under the agreement the distributors were to promote the sale of products and were expected to reimburse the company for sale promotion expenses, this clause is nullified by Article 4 clause Ii which requires the company to reimburse the distributors for all expenses including the expenses for sale promotion of the products. Not only that the company was to provide a free furnished office accommodation to the distributors with a telephone connection. By clause Iii the company was also to make or cause to be made requisite advertisement for the promotion of the business. In all these clauses of the agreement one looks in vain for any service that was to done by the distributors. Advertisement, office, sale promotion expenses are all to be borne by the company. In that context we fail to see as to what conceivable service was to be performed by the distributors for which such a heavy minimum amount of fee of Rs. I lakh and ^0 thousand per annum was being given to the respondents simply because six of these directors present had interest in similar arrangements to their advantage. In that view to expect any of them to have considered the benefit of the company is to ignore the obvious. The Board on 15-6-1967 did nothing but conveniently divided the assets of the company for the benefit of some of the Directors. The company was not only not a penny gainer but was on the other hand to be a loser in all respects. It is not even a case where the respondents were professionally qualified people who were expected to give their knowledge or experience of the trade to the company. Bedi the Chairman of the company admitted that the respondents had no experience of manufacture in this line nor had they done anything in furtherance of the sale products. In these circumstances the learned single Judge was, and we say so with respect, in error in holding that the directors acted bonafide and the agreement was for the benefit of the company and the transaction was in good-faith. The learned Judge seems to have assumed that because directors disclosed their interest and did not vote for the resolution that was end of the matter. But this is not so. Disclosure of interest and not voting on the resolution is only a formal aspect of the compliance with the statutory provision. The basic question is as to the conduct of Directors and whether it satisfies the test considering their fiduciary relationship to the company.

(22) We cannot but hold the terms of the agreement dated 1-6-1967 as approved by the Board were anything but to the detriment of the company. This was an arrangement which was made simply to siphon of Rs. I lakh and 20 thousand per annum as a minimum fee to the Directors without doing a single patch of work for the benefit of the company. This the directors were able to do because of their close association and control over the Board of Directors. This was not a case in which only one of the directors was favored by such arrangement. Six of the directors out of 13 who attended the meeting were the beneficiaries of the arrangement which was also agreed to by the 7th member who was the chairman of the company. This was a case of such blatant unfairness against the company that as the Supreme Court said that it would be obvious to any one who examines the affairs of the company even superficially that there was not one single redeeming feature in the agreement. In that view the company would have been justified, had any benefit been taken by the respondents to ask for the account and the restoration of the amount. In the present case the respondents chose to claim to have the matter referred to the arbitrator. It is interesting to note that in the statement of claim filed before the arbitrator the respondents have prayed for a payment of Rs. 6 lakhs which is worked out at the rate of 10,000/- per mouth for 5 years, no suggestion of having done any work is even mentioned. This also would show the untenable nature of the arrangement so far as the company was concerned. This agreement is patently against the interest and benefit of the company.

(23) We would, thereforee, hold that this agreement was vitiated and void and the official liquidator representing the company is entitled to ask for its recession. As we are satisfied that this agreement of 1-6-1967 which was approved by the Board of Directors on 15-6-1967 was not in the interest and benefit of the company the same is, thereforee, liable to be avoided by the Official Liquidator. In that view of the matter as the agreement is held not to be subsisting, being void, and as the arbitration clause forms a part of the agreement will naturally not survive. The effect would be that there is no existing arbitration agreement and the respondents cannot ask for the matter to be referred to arbitration.

(24) As a result we would in the circumstances, allow the appeal, set aside the judgment of the learned single Judge and dismiss the application of the respondents filed under Section 20 of the Arbitration Act. The parties will bear their costs throughout.

(25) We may note that the learned single Judge while appointing an arbitrator had fixed his fee at Rs. 4,000/- to be paid in equal shares by the Official Liquidator and the respondents. We are given lo understand by the Official Liquidator that the said amount has been paid equally by both the parties to the arbitrator. Though we are dismissing the application filed by the respondents, we however, make it clear that the fee which has already been paid to the arbitrator will not be sought to be refunded or claimed back. The arbitrator is entitled to retain the fee of Rs. 4,000/- paid to him. We are doing this because the matter has remained with the arbitrator for a long time and he has had a number of hearings and it is only proper that he should have been compensated though inadequately for the work that he has done. The appeal is allowed as above.


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