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Star Trading Corporation Vs. Rajratna Naranbhai Mills Company Ltd. (In Liquidation) - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtGujarat High Court
Decided On
Case NumberLetters Patent Appeal No. 10 of 1970
Judge
Reported in[1971]41CompCas1023(Guj); (1972)GLR200
ActsCompanies Act 1956 - Sections 34, 391, 446, 446(1), 446(2) and 446(3); Arbitration Act, 1940 - Sections 34
AppellantStar Trading Corporation
RespondentRajratna Naranbhai Mills Company Ltd. (In Liquidation)
Appellant Advocate P.V. Nanavati, Adv.
Respondent Advocate J.R. Nanavati, Adv.
Excerpt:
.....(1), 446 (2) and 446 (3) of companies act, 1956 and section 34 of arbitration act, 1940 - whether arbitration agreement between parties could be said to be excluded by section 446 (2) - arbitration agreement continues to bind company subsequent to order of winding up - arbitration agreement does not oust jurisdiction of court which is otherwise competent to entertain and decide dispute - section 446 (2) confers jurisdiction on high court to entertain and dispose of claim made by or against company in liquidation - suit filed in breach of arbitration agreement which continues to be binding on company despite making of order of winding up - high court on proper application on behalf of third party can stay suit - held, rejection of application for stay of suit on ground that arbitration..........the subject-matter of the suit was liable to be referred to arbitration in accordance with the arbitration agreement contained in each of the two contracts between the parties and the appellant was, at the time when the suit commenced, and still remained, ready and willing to do all things necessary to the proper conduct of the arbitration. the first respondent through its official liquidator opposed the application for stay mainly on the ground that on a proper interpretation section 446, sub-section (2), of the companies act, 1956, this court alone had jurisdiction to entertain and dispose of the suit and the arbitration agreement was excluded and there could accordingly be no question of staying the suit for the purpose of compelling the parties to have their dispute resolved by.....
Judgment:

Bhagwati, C.J.

1. This appeal raises an interesting question of construction of section 446, sub-section (2), of the Companies Act, 1956. It arises out of an application made by the appellant under section 34 of the Arbitration Act, 1940, for stay of Suit No. 1 of 1970, filed by the respondents against the appellant in this court. The suit came to be filed in the following circumstances. The first respondent, prior to its winding-up, entered into two contracts with the appellant for purchase of certain items of textile machinery and under the contracts the first respondent paid an aggregate sum of Rs. 39,852 to the appellant. The appellant was ready and wiling to deliver the contracted items of textile machinery to the first respondent against payment of the balance of the purchase price but the first respondent failed to take delivery owing to its difficult financial circumstances and the appellant, therefore, forfeited the sum of Rs. 39,852 on the basis that it represented earnest money paid by the first respondent to the appellant. The first respondent contested the claim of the appellant to forfeit the sum of Rs. 39,852 and its contention was that the sum of Rs. 39,852 was paid by the first respondent to the appellant not as earnest money but as part payment of the purchase price. The first respondent was in the meantime ordered to be wound up by an order made by this court on 26th June, 1967, and the official liquidator was appointed liquidator of the first respondent. Now each of the two contracts between the appellant and the first respondent contained an arbitration clause in the following terms :

'In the event of any dispute between the purchaser and the firm the matter should be referred to the arbitration of two merchants who are members of the Indian Merchants Chamber of Bombay, one to be nominated by each party to the contract. The arbitrator shall nominate an umpire who shall be qualified to be a sole arbitrator under this provision. The arbitration shall be held in accordance with the provisions of the Indian Arbitration Act, X of 1940, and any statutory modifications thereof for the time being in force.'

2. The official liquidator of the first respondent, however, instead of going to arbitration in accordance with the arbitration clause in each the two contracts, filed, with the leave of the learned judge in charge of winding up of the first respondent, Suit No. 1 of 1970 in this court to recover the sum of Rs. 39,852 together with interest from the appellant. There were two plaintiffs in the suit : one was the first respondent simpliciter and the other was the first respondent by its official liquidator. On service of the writ of summons, the appellant immediately made an application to this court for stay of the suit under section 34 of the Arbitration Act, 1940, on the ground that the dispute which formed the subject-matter of the suit was liable to be referred to arbitration in accordance with the arbitration agreement contained in each of the two contracts between the parties and the appellant was, at the time when the suit commenced, and still remained, ready and willing to do all things necessary to the proper conduct of the arbitration. The first respondent through its official liquidator opposed the application for stay mainly on the ground that on a proper interpretation section 446, sub-section (2), of the Companies Act, 1956, this court alone had jurisdiction to entertain and dispose of the suit and the arbitration agreement was excluded and there could accordingly be no question of staying the suit for the purpose of compelling the parties to have their dispute resolved by arbitration. Mr. Justice J. B. Mehta who heard the application was apparently impressed by the contention raised on behalf of the first respondent and he accordingly rejected the application. Hence, the present appeal under clause 15 of the Letters Patent by the appellant.

3. The principal question which arises for consideration in the appeal is whether the arbitration agreement between the parties could be said to be excluded by section 446, sub-section (2), of the Companies Act, 1956. The determination of this question calls for an interpretation of section 446, subsection (2), but in order to arrive at its proper meaning, it is necessary to refer also to sub-sections (1) and (3) of section 446. Section 446, subsections (1), (2) and (3), read as follows :

'446. Suits stayed on winding up order. - (1) When a winding-up order has been made or the official liquidator has been appointed as provisional liquidator, no suit or other legal proceeding shall be commenced, or if pending at the date of the winding-up order, shall be proceeded with, against the company, except by leave of the court and subject to such terms as the court may impose.

(2) The court which is winding up the company shall, notwithstanding anything contained in any other law for the time being in force, have jurisdiction to entertain, or dispose of -

(a) any suit or proceeding by or against the company;

(b) any claim made by or against the company (including claims by or against any of its branches in India);

(c) any application made under section 391 by or in respect of the company;

(d) any question of priorities or any other question whatsoever, whether of law or fact, which may relate to or arise in course of the winding up of the company;

Whether such suit proceeding has been instituted or in instituted, or such claim or question has arisen or arises or such application has been made or is made before or after the order for the winding up of the company, or before or after the commencement of the Companies (Amendment) Act, 1960.

(3) Any suit or proceeding by or against the company which is pending in any court other than that in which the winding-up of the company is proceeding may, notwithstanding anything contained in any other law for the time being in force, be transferred to and disposed of by that court.'

4. When a winding-up order has been made, sub-section (2) of section 446 says : the court winding up the company which would ordinarily be the High Court shall have jurisdiction to entertain or dispose of, inter alia, any claim made by or against the company notwithstanding anything contained in any other law for the time being in force. Sub-section (2) of section 446 is a provision conferring jurisdiction on the High Court to entertain and dispose of any suit r proceeding by or against the company and this provision is to be given effect to even if there is anything contrary in any other law for the time being in force. This provision is given an overriding effect : if there is any clash between this provision and any other law for the time being in force, it is this provision which must prevail and the other law, to the extent of the inconsistency, must give way. If, therefore, there is any other law which by express enactment or necessary implication detracts from the jurisdiction of the High Court to entertain and dispose of any claim made by or against the company, it shall not prevail and the High Court shall have jurisdiction entertain and dispose of the claim made by or against the company. The question is whether this provision excludes an arbitration agreement between a third party and the company so that once winding-up intervenes, such arbitration agreement cannot be enforced by a third party against the company.

5. Now one thing is clear that, when a company is ordered to be wound up, the arbitration agreement to which the company was a party it not superseded : it does not cease to be operative. The arbitration agreement continues to bind the company subsequent to the order of winding-up as it did before. It is obvious that this should be so because when a company is ordered to be wound up, it does not cease to exist as a company : no transformation takes place in so far as its legal or juristic entity is concerned. The rights, properties, assets and liabilities of the company continue to remain vested in the company. The only change which takes place is that the board of directors is dissolved and the management of the company is taken over by the official liquidator for the purpose of winding up the company. The company, therefore, continues to remain bound by the arbitration agreement just as it would remain bound by any other contract entered into prior to the date of winding-up. This becomes amply clear if we look at the provision enacted in section 446, sub-section (1). If an arbitration proceeding is pending against a company at the date of the winding-up order, it cannot, by reason of the bar enacted in section 446, sub-section (1), be proceeded with against the company except with the leave of the court and except on such terms as the court may impose. This provision clearly postulates that if leave is granted by the court, the arbitration proceeding can be continues against the company. But how can the arbitration proceeding can be continues against the company. But how can the arbitration proceeding be continued if the company ceases to be bound by the arbitration agreement Section 446, sub-section (1), therefore, necessarily involves the postulate that the arbitration agreement continues to bind the company even after an order has been made for winding it up.

6. But then the question is : what is the effect of the arbitration agreement on the jurisdiction of the High Court under section 446, sub-section (2) Does it in any way impinge upon that jurisdiction or detract from it Is the enforcement of the arbitration agreement inconsistent with the conferment of jurisdiction on the High Court under section 446, sub-section (2) The answer must clearly be in the negative. An arbitration agreement does not in any way oust the jurisdiction of the court which is otherwise competent to entertain and decide the dispute. It is a well-settled principle of jurisprudence that parties cannot by consent confer jurisdiction on the court or oust it. An arbitration agreement is merely a contract between the parties that the dispute between them shall be decided by the private from of arbitrators. It does not take away the jurisdiction of the court. A party to an arbitration agreement has a perfect right to bring an action in respect of the dispute covered by an arbitration agreement and the court has jurisdiction to try such dispute despite the existence of the arbitration agreement. The court cannot throw out the action on the grounds that it has no jurisdiction to entertain it. The court has, of course, discretion to say whether it will try the dispute or stay the action where the other party applies in time and otherwise complies with the conditions of section 34 of the Arbitration Act, 1940, but that is very much different form saying that the court has no jurisdiction to entertain the action. The very fact that the court may refuse to grant stay of the action shows that the court has jurisdiction entertain it. When the court stays the action, it does so not because of any lack of jurisdiction but because the court is of the view that a party should not be permitted to proceed with the action in breach or the arbitration agreement by which he is bound. See Russell on Arbitration, seventeenth edition, pages 65-66. There is, therefore, no antithesis between an arbitration agreement and the jurisdiction of the court to entertain the dispute covered by the arbitration agreement.

7. Here section 446, sub-section (2), confers jurisdiction on the High Court to entertain and dispose of any claim made by or against the company in liquidation and, therefore, if the company files a suit for enforcing a claim against a third party, it would have to be filed in the High Court. But if the suit is filed in breach of an arbitration agreement which continues to be binding on the company despite the making of the order of winding-up, the High Court can, certainly, in the exercise of its discretion under section 34 of the Arbitration Act, on proper application made to it one behalf of the third party, stay the suit with a view to enforcing the arbitration agreement. The High Court would not in such a case be disowning its jurisdiction. It would, on the contrary, be exercising its jurisdiction by saying that, though it has jurisdiction to entertain and dispose of the suit, it would hold the parties to their arbitration agreement and stay the suit filed in breach of the arbitration agreement.

8. It was then contended on behalf of the respondents, relying on section 446, sub-section (3), that, under that sub-section, even a suit which has been stayed by a civil court can be transferred to and disposed of by the High Court despite the order of stay passed by the Civil Court and that would go to indicate that the High Court has jurisdiction to proceed with a suit or proceeding despite the existence of an arbitration agreement. This contention is, in our opinion, without force. Section 446, sub-section (3), is merely a consequential provision following upon section 446, sub-section (2), providing for transfer of suits or proceedings pending in courts other than the High Court. That provision does not mean that while exercising jurisdiction under section 446, sub-section (2), in respect of a suit or proceedings transferred under section sub-section 446, sub-section (3), the High Court can ignore the arbitration agreement which is binding on the parties. Once the position is reached that the arbitration agreement continues to bind the company even after it is ordered to be wound up, the conclusions inevitable that the High Court can, in the exercise of its jurisdiction in relation the suit, stay it leaving the parties to have their dispute adjudicated upon by the private forum provided under the arbitration agreement. When an award is made in the arbitration proceeding, the court would pass a decree in the suit in terms of the award and dispose it of.

9. We are, therefore, of the view tat Mr. Justice J. B. Mehta was not right in rejecting the application of the appellant for stay of the suit on the ground that the arbitration agreement was excluded by the provisions of section 446, sub-section (2). We, accordingly, set aside the order made by Mr. Justice J. B. Mehta and remand the application for stay for disposal on merits. The learned judge who hears the application for stay on remand will consider whether this is a fit and proper case for granting stay under section 34 of the Arbitration Act, 1940. The respondents will pay the costs of the appeal to the appellant.


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