Mohta Alloy And Steel Works vs Mohta Finance And Leasing Co. Ltd.
1996 Latest Caselaw 893 Del

JUDGMENT

Dr. M.K. Sharma, J.

1. This is a petition under section 33 of the Arbitration Act filed by the petitioner challenging the existence and validity of the arbitration clause forming part of the lease agreements entered into between respondent No. 1 and the petitioner-company.

2. The petitioner-company was incorporated under the Companies Act in the year 1972. On February 1, 1978, the name of Mohta Alloys and Steel Works Limited was changed to Mohta Industries Limited. Both the petitioner company and Mohta Industries Limited at that point of time were part of the Mohta group of industries. The Mohta group also floated respondent No. 1 which was incorporated on September 21, 1982. During the years 1983-86 lease agreements were executed between respondent No. 1 and the petitioner, namely, Mohta Industries Limited. The said lease agreements were executed by Mr. M.C. Aggarwal signing on behalf of both the companies as their director except two lease agreements wherein one of the signatories was Mr. A.B. Chaugh and in the other it was Mr. M.R. Bhoomla. The rents were paid to respondent No. 1 in terms of the aforesaid lease agreements by the petitioner. Subsequently, the financial position of Mohta Industries Limited became precarious and, consequently, the petitioner was declared a sick industrial company under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985. In 1986, the nominees of Mahavir Spinning Mills Limited who is the present management of the petitioner were co-opted as directors. On November 28, 1988, the Board for industrial and Financial Reconstruction sanctioned a scheme for rehabilitation of Mohta Industries Limited.

3. The scheme for rehabilitation envisaged amalgamation of Mohta Industries Limited with another public limited company, namely, Mahavir Spinning Mills Limited. In terms of the aforesaid amalgamation the petitioner came to be owned by Mahavir Spinning Mills Limited. The petitioner started committing defaults in the payment of monthly rentals to respondent No. 1 from August, 1987. In view of the aforesaid default committed by the petitioner respondent No. 1 terminated the lease agreement by its letter dated September 2, 1989, and called upon the respondent No. 1 to clear the outstanding amounts along with the interest. The petitioner, in spite of the aforesaid notice issued by respondent No. 1, failed to clear the dues and accordingly on January 18, 1990, respondent No. 1 wrote a letter to the Punjab and Haryana Chambers of Commerce seeking to invoke the arbitration clause of the lease agreements. The petitioner received notice of the same from the Punjab and Haryana Chambers of Commerce under their letter dated November 11, 1990, in pursuance of which a written statement was filed by the petitioner on December 13, 1991. Both respondent No. 1 and the petitioner filed their statement of claims before the arbitrator and also evidence by way of affidavits. The arbitrator also proceeded to take evidence in the said proceedings and at present the said proceedings are pending disposal at the arbitrator's end.

4. The petitioner in the written statement filed before the arbitrator took up a plea in respect of the jurisdiction of the arbitrator to entertain and adjudicate upon the said dispute. Since the arbitrator, instead of deciding the question of jurisdiction raised by the petitioner in the arbitration proceedings, proceeded with the arbitration, the petitioner preferred the present petition before this court under section 33 of the Arbitration Act. After completion of the pleadings of the parties this court by order dated March 21, 1995, framed six issues as follows.

1. Is it proved that the arbitration agreement is legal, enforceable and binding ?

2. Is it proved that the arbitration agreement has the basis of legal and valid agreement ?

3. Whether the claim of the petitioner and the petition under section 33 of the Arbitration Act is barred by limitation ?

4. Whether the petition under section 33 of the Arbitration Act is not maintainable, as contended by defendant No. 1 ?

5. Whether the petitioner is entitled to the reliefs in view of the objections raised by respondent No. 1 ?

6. To what relief, if any, is the petitioner entitled ?

5. I have heard learned counsel for the parties and have given my thoughtful consideration to the matter involved.

6. Since issue No. 4 relates to the maintainability of the present petition and issue No. 3 relates to the issue of the present petition being barred by limitation, it would be appropriate that those two issues are taken up first one after the other and thereafter to deal with and give my findings on the remaining issues.

7. Dr. Ghosh, learned counsel for the respondents, submitted that in an application filed by the petitioner under section 33 of the Arbitration Act a contract cannot be declared to be invalid or set aside. According to learned counsel a reference to the prayer clause of the petition would show that the petitioner had challenged the entire contract and not the arbitration clause alone. He drew my attention to the prayer clause (a) of the petition wherein the petitioner has prayed for a declaration that the lease agreements were fraudulent, fabricated and antedated documents and that in prayer (b), the petitioner has sought for a declaration that the lease agreements are void as Shri M.C. Aggarwal had no authority to enter into the aforesaid lease agreements whereas in prayer clause (e) declaration has been sought for declaring the lease agreements to be void in law as there was no pre-consent, whereas in prayer (d) the declaration is sought for cancellation of the lease agreements. According to learned counsel only in prayer (d) there is a prayer that the arbitration clause be declared as not binding on the petitioner. In support of his submission, learned counsel also relied upon the decision of the Calcutta High Court in State of Bombay v. Adamjee Hajee Dawood and Co., . It was submitted that the ratio of the aforesaid Calcutta High Court decision was approved by the decision of the Supreme Court in Orient Transport Co. v. Jaya Bharat Credit and Investment Co. Ltd., , wherein it had been held that under section 33 of the Arbitration Act only the arbitration agreement and not the contract could be challenged. Learned counsel further submitted that except for prayer (d) wherein arbitration clause had been referred to all other clauses in the prayer portion of the petition revolve around the contract agreement as a whole and that even in prayer (d) there is no challenge to the validity of the arbitration agreement but only to the effect that it was not binding on the petitioner.

8. Mr. Shakdhar, counsel appearing for the petitioner on the other hand, in reply to the aforesaid objection taken in respect of the maintainability of the petition, took me through the provisions of sections 31, 32 and 33 of the Arbitration Act and submitted that a civil suit would not lie where a person seeks to challenge the existence and/or validity of an arbitration agreement. It is submitted that the petitioner could not have sought for invalidation of the arbitration agreement without seeking invalidation of the parent agreement and, therefore, the present application is maintainable. In support of his submission, learned counsel relied upon the decision in Khardah Company Ltd. v. Raymon and Co. (India) Pvt. Ltd. , Waverly Jute Mills Co. Ltd. v. Raymon and Co. (India) Pvt. Ltd. , U.P. Rajkiya Nirman Nigam Ltd. v. Indure Pvt. Ltd. [1996] 2 JT 322 and Renusagar Power Co. v. General Electric Co. .

9. In Orient Transport Co. v. Jaya Bharat Credit and Investment Co. Ltd., , it has been held in paragraph 3 that sections 32 and 33 of the Arbitration Act on a true construction do not purport to deal with suits for declaration that there was never any contract or that contract is void. This principle is well settled. Referring to the decision of the Calcutta High Court in the case of State of Bombay v. Adamjee Hajee Dawood and Co., , the Supreme Court approved the conclusion of the Calcutta High Court that section 32 of the Act does not contemplate the case of a suit challenging the validity of a contract merely because it contains an arbitration clause. The submission of learned counsel for the petitioner that unless he seeks to challenge the parent agreement he could not have challenged the arbitration agreement, in my considered opinion is without any merit. The existence and validity of an arbitration agreement could be challenged independently without there being any challenge made to the parent agreement namely, the contract agreement itself. The main thrust of learned counsel for the petitioner during the course of his arguments was all along that the entire contract agreement is invalid in view of the fact that the same was not entered into by a person authorised in accordance with law and that the same has been entered into on behalf of both the companies by the same person, which is not permissible in law. Therefore, there is no independent challenge to the arbitration agreement in the present suit, but the entire agreement as a whole has been challenged mainly on the aforesaid two counts. In Khardah Company Ltd. v. Raymon and Co. (India) Pvt. Ltd. , on which counsel for the petitioner placed heavy reliance in support of his submission, the Supreme Court has held that when an agreement is invalid every part of it including the clause as to arbitration contained therein must be held to be invalid. If we glance through the prayer clause of the petition it would also be apparent that except for prayer (d) all the other prayers in the petition related to seeking for a declaration that the said agreements are void and that they should be declared to be cancelled. It is only in prayer (d) that the petitioner has referred to the arbitration clause and has sought for a declaration that the said arbitration clause is not binding on it on consideration of the reason that the contract itself is invalid having been executed by a person not authorised and that the same person executed the contract on behalf of both the companies. In my considered opinion, the petitioner has challenged the validity of the contract as a whole which contained an arbitration clause. On consideration of the ratio of the aforesaid decisions relied upon by the counsel for the parties, I find that the decision of the Supreme Court in Orient Transport Co. v. Jaya Bharat Credit and Investment Co. Ltd., , is applicable to the facts of the present case. However, since the petitioner has sought for a decision of this court on the issue of applicability of the arbitration agreement to it vide relief (d) of the plaint and since lengthy arguments have been advanced by the parties relating to the validity of the agreements themselves containing arbitration agreement, I consider it to be appropriate to decide the said issue raised herein. This issue stands answered accordingly.

10. Now, I propose to discuss hereunder the next issue raised by the respondents that the present petition is barred by limitation since the same also relates to the root of the matter.

Issue No. 3 :

11. The lease agreements as against which declarations have been sought for in the present suit were entered into in the years 1983, 1984 and 1986. The present application under sections 32 and 33 of the Arbitration Act has been filed in the month of March, 1993. The limitation prescribed for filing an application under section 33 of the Arbitration Act is admittedly three years as the residuary article 137 of the Limitation Act would be applicable for filing such an application. As has been held by the Supreme Court in the case of Kerala State Electricity Board v. T.P. Kunhaliumma, , article 137 of the Limitation Act applies not only to applications under the Code of Civil Procedure but to all the applications including applications under special laws. It was held in the said decision that the words "any other application" under article 137 cannot be said on the principle of ejusdem generis to be applications under the Civil Procedure Code other than those mentioned in Part I of third division and that any other application under article 137 would be petition or any application under any Act. A legal notice claiming the outstanding lease dues was issued by the respondent and was served on the petitioner in the year, 1991. Learned counsel for the respondent submitted that accordingly, the present application of the petitioner filed in March, 1993, is beyond the period of three years contemplated under the provisions of article 137 of the Limitation Act if the date of knowledge is construed from the date of service of the said legal notice. Besides, according to him, the reference to arbitration was made by the respondent in January, 1990, whereas the present petition was filed in the month of March, 1993, which is apparently more than three years after the reference to arbitration was made. Therefore, immediately on the knowledge of filing of the said arbitration application for reference filed by the respondents in the month of January, 1990, the petitioner had full knowledge about the existence of the lease agreements which also contain the arbitration agreement.

12. Counsel for the petitioner in reply submitted that the petitioner in the present petition is challenging the jurisdiction of the arbitrators on the ground that the arbitration agreement from which they seek to derive jurisdiction is not in existence and/or is invalid. According to him, the petition under section 33 of the Arbitration Act instituted to challenge the jurisdiction of the arbitrators could not be equated to a civil suit to challenge the transaction. He further submitted that during the period from July, 1982, to January, 1986, when the disputed lease agreements were said to have been executed the petitioner concern and the respondent company were under the same management and, therefore, the knowledge of the present management of the petitioner concern could not be attributed prior to November 11, 1990, when the petitioner got a notice from the arbitrators informing that an arbitrator has been appointed and that it should file its defense to the respondent's statement of claims. According to him, the action of the arbitrators in proceeding with the arbitration despite objection raised by the petitioner in assuming jurisdiction in respect of the lease agreement in question had given rise to a fresh cause of action and, therefore, the present petition is not barred by limitation.

13. In the rejoinder affidavit filed on behalf of the petitioner, it is stated that the present management and its officers attained full control over the affairs of the petitioner concern only after November 28, 1988, and that the payments towards lease rentals which were made before November 28, 1988, were made inadvertently and under mistake of law, which cannot bind the present management of the petitioner-company. The petitioner did not immediately write to the respondent claiming refund of the lease rentals nor did it repudiate the lease agreements. The lease agreements entered into in 1983, 1984 and 1986 were all acted upon by both the petitioner and the respondents even after the representatives of the present management were appointed as directors of the petitioner-company. The lease rentals were also paid. The petitioner is a legal entity and because there was a change in the management the petitioner cannot claim that the knowledge of the petitioner about existence of the aforesaid lease agreements during the aforesaid period of 1983, 1984 and 1986, would commence only when the arbitrator continued with the arbitration proceeding in spite of objection raised by the petitioner. The representatives of the present management were also included in the board of management prior to November, 1988, and, thereafter, also lease rentals were paid to the respondents. The respondents served a legal notice on the petitioner claiming outstanding lease rent on April 28, 1989. After service of the aforesaid notice the petitioner at least had definite knowledge about the existence of lease agreements as admittedly the management of the petitioner vested with the present management with effect from November 28, 1988. The present petition has been filed in the month of March, 1993, which is apparently beyond the period of three years from the aforesaid dates also. In the facts and circumstances of the present case, therefore, I have no hesitation in my mind to hold that the present petition is barred by limitation.

Issues Nos. 1 and 2 :

14. As these issues involve the same facts and are similar in nature, they are taken up together for consideration.

15. Learned counsel appearing for the petitioner submitted that the arbitration agreement contained in the lease deeds are not binding on the petitioner mainly on two grounds - (i) that the lease agreements in question were not executed by a person duly authorised by the petitioner, and (ii) the same person having executed the lease deeds on behalf of both the companies the aforesaid agreements had no legal validity and, accordingly, the arbitration agreements mentioned therein which are part of the aforesaid agreements could not be enforced nor are valid. According to learned counsel for the petitioner there was no resolution passed by the board of directors of the petitioner authorising Shri M.C. Aggarwal to execute the alleged agreements with the respondent company and there being no such resolution by the board of directors authorising Shri M.C. Aggarwal, he was neither competent nor had any power to enter into the aforesaid lease agreements on behalf of the petitioner. Learned counsel submitted that an authority can only be vested in a person for the purpose of entering into contracts on behalf of the company either by the board of directors or by the memorandum or articles of association. In support of his submission learned counsel relied upon a few passages from Pennington's Company Law, 5th edition, page 125 and Gower's Principles of Modern Company Law, Student's Edition, 5th edition, pages 159 to 161.

16. Dr. Ghosh, learned counsel for the respondent, on the other hand drew my attention to a letter of the chairman of the petitioner dated August 1, 1984. The contents of the said letter, according to counsel, clearly empower Shri M.C. Aggarwal, to enter into and/or to execute the lease agreements with the respondent company. He also drew my attention to the provisions of the articles of association of the petitioner-company particularly the provisions of article 121A which provide that without prejudice to the general powers conferred by the last preceding article and to any other powers or authority conferred by these presents on the directors or on the managing director, the directors shall have certain powers. Sub-clause (18) therein provides that the directors shall have power to enter into all such negotiations and contracts and rescind and vary all such contracts and execute and do all such acts, deeds and things in the name and on behalf of the company as they may consider expedient for or in relation to any of the matters aforesaid or otherwise for the purposes of the company. Sub-clause (22) of the aforesaid article further provides that subject to the provisions of the Act, to delegate all or any of the powers hereby conferred upon them to the managing director or to any other director or employees of the company as they may from time to time think fit, other than a power to issue debentures.

17. Relying on the aforesaid provisions, learned counsel submitted that a director is empowered under the aforesaid provisions of the articles of association to enter into a contract in the nature of the lease agreements involved in the present case. He further submitted that there was also ratification by the petitioner of the actions of Shri M.C. Aggarwal in entering into the said lease agreements from the year 1982 onwards inasmuch as payments towards rental had been made by the petitioner to respondent No. 1 in terms of the aforesaid lease agreements as would be apparent from the statement annexed to the affidavit of Mr. V. Ganesh and even from the rejoinder affidavit of the petitioner that the petitioner had acted upon the said lease agreements. According to him, even if there be any irregularity in the execution of the lease agreements there could be waiver of the irregularity by affirming the transaction by the petitioner. According to him, as and when there is such a waiver of the irregularity the said lease would be deemed to be valid and affirmed and acted upon. In support of his submission he relied upon the decision of the Supreme Court in Narayandas Shreeram Somani v. Sangli Bank Ltd. . He further submitted that so far as the execution of the lease agreements is concerned the same is a matter relating to the doctrine of indoor management and if the transaction is not inconsistent it would be assumed that all actions have been done regularly. Learned counsel also submitted that there was also waiver and acquiescence on the part of the petitioner, by the conduct of the petitioner by making payment of the rents in pursuance of the aforesaid lease agreements. The lease agreements were valid as they were acted upon and their objection to the validity, if any, of the lease agreements having been waived in the lease agreement the lease agreements cannot be challenged.

18. I have considered the submissions made by counsel for the parties. Article 121A of the articles of association, a copy of which was produced before me, specifically lays down that the directors and the managing director have been vested with certain powers, one of which is to enter into negotiations and contracts and rescind and vary all such contracts and execute and do all such acts, deeds and things in the name and on behalf of the company as they may consider expedient. Therefore, in view of the aforesaid provisions the directors of the petitioner-company are empowered under the articles of association to enter into contracts like the lease deeds executed in the present case. The extracts relied upon by the counsel for the petitioner from Pennington's Company Law and Gower's Principles of Modem Company Law, Student's Edition, also laid down that validity could be vested in a person for the purpose of entering into contracts on behalf of the company either by the board of directors collectively or by the memorandum and articles of association. Mr. Shakdhar, learned counsel for the petitioner however, submitted that the provisions of article 121A clearly indicate that the powers referred to in article 121A (1 to 21) are those which are available to the board of directors and that no single director has the authority to exercise any of the powers stipulated in article 121A (1 to 21) till they are delegated to such director or employee by the board of directors. Accordingly, in his submissions the word "directors" appearing in article 121A (1-21) relates to board of directors and not to individual director. The aforesaid submission of learned counsel appears to be without force. On a reading of the aforesaid provisions it appears that the word "directors" as is used in the aforesaid provision relates also to an individual and single director who is empowered to enter into negotiations, contracts and execute all such acts, deeds and things in the name of and on behalf of the company as he may consider expedient. This view gets support from the definition clause of the articles of association wherein the word directors has been defined as directors for the time being of the company and shall include managing director or whole-time director but shall not include any employee designated as executive director or works director or by any other word prefixed or suffixed to the word director. The expression "board of directors" is also defined as the board of directors for the time being in force. So far as article 121A (1-21) is concerned it uses the expression "directors" and not "board of directors" and, therefore, the expression "directors" appearing in article 121A envisages even an individual and single director.

19. Even otherwise the chairman of the petitioner-company has issued a letter on August 1, 1984, authorising Shri M.C. Aggarwal specifically to execute any agreement with the respondent company. Even after the execution of the aforesaid lease agreements by Shri M.C. Aggarwal on behalf of the petitioner-company effect was given to the terms and conditions of the said agreements by the petitioner and also payments were made by the petitioner to respondent No. 1, after the execution of the agreements till the petitioner defaulted in making the payments of the lease rentals from October, 1987. Even subsequently when representatives of the present management, namely, Mahavir Spinning Mills Limited were co-opted on the board of directors of the petitioner Mohta Industries Limited, thereafter also rents were paid by the petitioner to the respondent and, therefore, there was apparent ratification of the lease agreements executed on behalf of the petitioner by Shri M.C. Aggarwal and there was also waiver and acquiescence in respect of the said lease agreements on the part of the petitioner. In this connection reference may be made to the decision of the Supreme Court in Narayandas Shreeram Somani v. Sangli Bank Ltd. . It is held in that decision that even in case of irregularity of a decision/resolution of the company, the same could be avoided by the company, but instead of avoiding it if the company waives the irregularity and affirms the contract, the same would be valid and binding. Counsel for the petitioner referred to the provisions of sections 10 and 11 of the Indian Contract Act and submitted that on a harmonious reading of sections 10 and 11 of the Indian Contract Act and section 46 of the Companies Act, it is clear that no agreement is enforceable in law against a company which is entered into on its behalf by an agent, i.e., the director, who does not have any authority. As has been held above a director has the company's authority to enter into and execute a contract like the lease agreements and also in view of the ratification and waiver on the part of the petitioner no challenge could be made to the action of Shri M.C. Aggarwal in executing the lease agreements on behalf of the petitioner company.

20. Section 46 of the Companies Act provides that if a contract is "by law required to be in writing signed by the parties, then the same may be signed for the company" by any person acting under its authority, express or implied. Reference was also made to sections 10 and 11 of the Contract Act to emphasise that a contract would be valid when it is entered into by persons competent to contract. In the present case, express authority to enter into contracts like the lease agreements has been given to a director and, therefore, Shri M.C. Aggarwal was competent and properly and validly authorised to enter into the lease agreements. Even otherwise the chairman authorised Shri Aggarwal to enter into the aforesaid contracts by specific order, as has been noticed above.

21. The petitioner is a legal entity and because there was a change of management the petitioner cannot claim that the effect of acting upon the lease agreements during the years from 1982 to 1987 is not binding on it. Even according to the petitioner by November, 1988, the petitioner came to know that lease rentals were paid by the petitioner to respondent No. 1. Even thereafter the petitioner did not claim refund of the lease rentals prior to February, 1991.

22. In view of the fact that various powers could be delegated to the managing director or directors and also because the director had the authority to enter into contracts the respondent could validly rely on the doctrine of indoor management. In this connection reference may be made to a passage from Ramaiya's Guide to the Companies Act, 13th edition, at page 363, wherein it is stated thus :

"In many cases express authority will be found in the articles, as for instance, authority given to the board of directors; but the articles may further empower the delegation of the director's powers to committees, managers, managing director, or other persons and such delegation may be made either express or by implication."

23. In Pennington's Company Law, 5th edition, at page 141, it is stated thus :

"In practice the articles of companies contain the widest powers of delegation, both to individual directors and to other agents chosen by the board."

24. Now coming to the other issue raised by counsel for the petitioner about the lease agreements being signed by Shri M.C. Aggarwal on behalf of both the parties, it is already noticed that the said lease agreements were entered into by two different legal entities through Shri M.C. Aggarwal. It is well settled that one person can enter into an agreement with himself. Section 5 of the Transfer of Property Act envisages transfer of property by a "person to one or more living persons or to himself and one or more other living persons." In LIC v. India Automobiles and Co. it was held by the Supreme Court that a contract between a person with himself and others is valid. On the aforesaid analogy the lease agreements entered into by two separate and distinct legal entities cannot be held to be invalid merely because the said documents were signed by one person who was the director of both the legal entities.

25. On a consideration of all the aforesaid provisions it appears that Shri M.C. Aggarwal was authorised to enter into and execute all contracts of the nature of lease agreements and there being also ratification of the said agreements by the petitioner-company and there being also waiver and acquiescence on the part of the petitioner in respect of the aforesaid lease agreements and also taking into consideration the fact that execution of a contract is a managerial act relating to indoor management and functioning of the petitioner, I hold that the lease agreements coupled with the arbitration agreements cannot be said to be invalid on that count and cannot be declared to be not binding on the petitioner.

26. In view of the aforesaid findings arrived at by me on appreciation of the evidence on record and the submissions of learned counsel for the parties, the petitioner is entitled to no relief and, therefore, issues Nos. 5 and 6 are answered accordingly. The petition stands dismissed with costs.