CWP No.17753 of 2009 1 In the High Court of Punjab and Haryana at Chandigarh. Date of decision: 27.04.2010 PML Industries Limited .... Petitioner Versus Shri N.S. Kang, Sole Arbitrator and another .... Respondents. CORAM: HON'BLE MR. JUSTICE PERMOD KOHLI Present: Mr.Anil K. Aggarwal, Advocate,for the petitioner. Mr. NS Boparai, Advocate,for the respondents. PERMOD KOHLI, J. Legality and validity of the order dated 05.10.2009 passed by the Sole Arbitrator (respondent No.1) in a dispute between the petitioner-company and respondent No.2-Corporation, has been challenged through the medium of the present writ petition. Factual background necessary for the adjudication of the issue raised in this petition is being noticed hereinafter. The petitioner is a company registered under the Companies Act, 1956 (hereinafter referred to as the Act of 1956), having its registered office at SCO No.62-63, First Floor, Sector 34-A, Chandigarh. This company was established for manufacturing and export of Frozen Boneless Buffalo Meat. The industrial unit of the company was set up at village Bahera, Tehsil Dera Bassi, in the State of Punjab. Respondent No.2 is the Government Corporation wholly owned and controlled by the Government of Punjab. A Financial Collaboration Agreement was executed between the petitioner-company through Dr. AS Bindra and respondent No.2-Corporation for setting up of 100% Export Orientated Unit in the name of Punjab Meat Limited now changed to PML Industries Limited for CWP No.17753 of 2009 2 manufacturing of Frozen Boneless Buffalo Meat. This mutual agreement came to be executed on 12.05.1992 laying down mutual terms and conditions. Respondent No.2 invested an amount of Rs.4.60 Crores in the share capital of the petitioner- company in terms of the Financial Collaboration Agreement. Dr. AS Bindra and his other share holders also invested in the share capital of the PML Industries Limited. The total paid up of share capital of the company at the time of filing of this petition is stated to be Rs.19, 47, 62,750/- divided into 1, 94, 76, 275 equity shares of Rs.10/- each. The company set up a slaughter house at Dera Bassi in the State of Punjab. It appears that there was protest by the local people. In view of the protest and agitation, the then Chief Minister of Punjab, decided to withdraw the Punjab Government share from the company as contribution of respondent No.2. A number of correspondence took place between the parties regarding withdrawal of equity contributions. Even the Deputy Commissioner, Patiala, initiated proceedings for closure of the factory. It seems that the petitioner company set up its industrial unit at village Bahera, Tehsil Dera Bassi, in the State of Punjab, where the commercial production is stated to have started on 01.03.1996. It is further alleged that on account of withdrawal of the share by respondent No.2-Corporation, the unit became sick and its accumulated loses exceeded its net worth as per the audited balance sheet of the company as on 31.03.1998. The petitioner company, accordingly, made a reference to the Board for Industrial and Financial Reconstruction (hereinafter referred to as the BIFR). This reference was registered as Case No.346 of 1998 and the company was declared as Sick Company by the BIFR vide its order dated 14.05.1999. A revival and rehabilitation scheme is stated to be pending before the BIFR. Respondent No.2-Corporation having withdrawn its equity capital from the petitioner-company by terminating the Financial Collaboration Agreement, asked the petitioner-company to pay its share capital contributed by it. On failure of the petitioner to return the money, respondent No.2-Corporation CWP No.17753 of 2009 3 invoked Arbitration Clause No.35 of the Financial Collaboration Agreement by serving a legal notice dated 03.05.2001. Under the Financial Collaboration Agreement, the Secretary, Agriculture, Government of Punjab, was to act as a Sole Arbitrator. The nominated sole arbitrator entered upon the reference. Respondent No.2-Corporation filed its statement of claim. It seems that Dr. AS Bindra who was one of the parties to the Financial Collaboration Agreement, objected to the arbitration proceedings through his reply on the ground that since Financial Collaboration Agreement dated 12.05.1992, which inter-alia, contains arbitration clause having been terminated by respondent No.2-Corporation, it is estopped from invoking the arbitration clause under the same agreement. The then sole arbitrator vide his order dated 26.09.2002 declared the arbitration proceedings as void ab initio in view of the letter of respondent No.2-Corporation dated 26.07.1995 regarding withdrawal of the corporation from the petitioner- company. This order of the Arbitrator came to be challenged by respondent No.2-Corporation under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the Act). The Additional District Judge, Chandigarh, allowed the application under Section 34 of the Act and set aside the order of the sole arbitrator and remitted back the matter to the Arbitrator for a fresh decision in accordance with law after affording opportunity of being heard to both the parties. In the meantime, the new Secretary Agriculture, Government of Punjab, joined on account of transfer of the earlier incumbent and fixed 03.08.2009 as the next date of hearing. On 27.08.2009, an application dated 25.08.2009 was preferred seeking adjournment of arbitration proceedings, sine die, in view of the provisions of Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as the SICA). This application has been decided by the new Arbitrator vide the impugned order referred to above. Thus, the sole question raised and argued in the present writ petition is whether the proceedings before the Arbitrator are liable to be stayed under Section 22 of CWP No.17753 of 2009 4 the SICA. Section 22 of the SICA reads as follows:- “Suspension of legal proceedings, contracts, etc.- (1) Where in respect of an industrial company, an enquiry under Section 16 is pending or any scheme referred to under Section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under Section 25 relating to an industrial company is pending, then, not withstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of receiver in respect thereof (and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans, or advanced granted to the industrial company) shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellant Authority.” The contention raised on behalf of the petitioner-company is that the provisions of Section 22 of the SICA are attracted in the present case as the arbitration proceedings are merely a distinct form of a suit for recovery and, thus, the proceedings are liable to be stayed except with the consent of the Board. To the contrary, the stand of respondent No.2-Corporation is that arbitration proceedings cannot be construed a suit and once the arbitration commences it has to proceed to its logical end. It is, accordingly, argued that Section 22 of the SICA is not applicable in the present case. Another objection CWP No.17753 of 2009 5 which has been raised by respondent No.2-Corporation is that the petitioner- company has the remedy of invoking Section 34 of the Conciliation Act and, thus, this petition is not maintainable. It is further contended that at the time of making of the reference to the Arbitrator, no objection was raised by the petitioner- company, hence, it is estopped from raising any such objection at this stage. It is admitted case of the parties that the petitioner-company has been declared as a Sick Industrial Company within the meaning of Section 15 of the SICA and reconstruction and rehabilitation proceedings are under consideration of the BIFR. Earlier when Mr. Bindra objected to the continuation of the arbitration proceedings before the Arbitrator and the Arbitrator declared the proceedings as null and void, respondent No.2-Corporation had invoked the jurisdiction of the Civil Court under Section 34 of the Arbitration and Conciliation Act, 1996, for setting aside of the order of the Arbitral-Tribunal. The Court i.e. the Additional District Judge, Chandigarh, set aside the order of the sole Arbitrator and directed the Sole Arbitrator for deciding the matter in question a fresh according to law after affording opportunity of being heard to both the parties. After remand, the Arbitral-Tribunal has now passed the impugned order under challenge in this petition. Petitioner has relied upon Maharashtra Tubes Ltd. Vs. State Industrial and Investment Corporation of Maharashtra Ltd. and another, 1993, Company Cases (Vol. 78), 803. In this case, the Financial Corporation (FC) initiated proceedings under Section 29 of the State Financial Corporation Act, 1951, while the proceedings in respect to the Industrial Unit under Section 15 of the SICA were pending before the BIFR. The Industrial Unit declared as Sick Unit, invoked Section 22 of the SICA. High Court declined the relief. While considering the question whether Section 22 of the SICA would be attracted, the Hon’ble Supreme Court set aside the judgment of the High Court holding that Section 22 (1) of the SICA is not attracted, observed as under:- CWP No.17753 of 2009 6 “Now we come to the impugned decision. The High Court was considerably influenced by the fact that the appellant- company owed crores of rupees to banks and felt that so far as such creditors are concerned, different considerations may come into play but the High Court with respect failed to appreciate that the 1985 Act was enacted primarily to assist sick industrial undertakings which, inter-alia, failed to meet their financial obligations. It is, therefore, difficult to accept the view of the High Court that where the creditors of a sick industrial concern happen to be banks or State Financial Corporations different considerations would come into play. It must be realised that in the modern industrial environment large industries are generally financed by banks and statutory corporations created specially for that purpose and if they are permitted to resort to independent action in total disregard of the pending inquiry under sections 15 to 19 of the 1985 Act, the entire exercise under the said provisions would be rendered nugatory by the time the BIFR is able to evolve a scheme of revival or rehabilitation of the sick industrial concern by the simple device of the Financial Corporation resorting to Section 29 of the 1951 Act. We are, therefore, of the opinion that where an inquiry is pending under Section 16/17 or an appeal is pending under Section 25 of the 1985 Act, there should be cessation of the coercive activities of the type mentioned in section 22 (1) to permit the BIFR to consider what remedial measures it should take with respect to the sick industrial company. The expression “proceedings” in section 22 (1), therefore, cannot be confined to legal CWP No.17753 of 2009 7 proceedings understood in the narrow sense of proceedings in a court of law or a legal Tribunal for attachment and sale of the debtor's property.” The petitioner has heavily relied upon another judgment of the Hon'ble Supreme Court in the case of Paramjeet Singh Patheja Vs. ICDS Ltd., AIR 2007, Supreme Court, 168, wherein the Hon’ble Supreme Court specifically brought within purview of Section 22 of the SICA, the arbitration proceedings. The relevant observations are contained in paragraph 60 of the judgment which are as follows:- “(i) to (vi) XX XX XX (vii) It is a well established rule that a provision must be construed in a manner which would give effect to its purpose and to cure the mischief in the light of which it was enacted. The object of Section 22 in protecting guarantors from legal proceedings pending a reference to BIFR of the principal debtor, is to ensure that a scheme for rehabilitation would not be defeated by isolated proceedings adopted against the guarantors of a sick company. To achieve that purpose, it is imperative that the expression “suit” in Section 22 be given its plain meaning, namely, any proceedings adopted for realization of a right vested in a party by law. This would clearly include arbitration proceedings.” To the contrary, the learned counsel for the respondents has referred to an order passed by the Hon’ble Judge of the Supreme Court while exercising jurisdiction under Section 11 (6) of the Conciliation Act. Under Section 11 (6) of the Conciliation Act, where the dispute relate to the international agreements, the Arbitrator is to be appointed by the Hon’ble Chief Justice of India or his nominee. It seems that one of the Hon’ble Judge was nominated by the Hon’ble CWP No.17753 of 2009 8 the Chief Justice of India to consider an application under Section 11 (6) of the Conciliation Act. While this application was being considered, an objection was raised to the reference being made to the Arbitrator in view of the fact that the Company, party to the arbitration had already moved before the BIFR and proceedings under Sections 15 to 17 of the SICA, were pending. The Hon’ble Judge, however, rejected the contention and held that Section 22 of the SICA does not debar the arbitration proceedings under Conciliation Act. This order is reported as San-A Trading Co. Ltd. Vs. I.C. Textiles Ltd., 2007 (1) Banker’s Journal, 485 (Supreme Court). However, subsequently in another petition under Section 11 (6) before another Hon’ble Nominee Judge of the Hon’ble Supreme Court, the matter was referred to a Larger Bench regarding the applicability of Section 22 of the SICA as is evident from the order dated 16.03.1999, reported as Agio Countertrade (P) Ltd. Vs. Punjab Iron & Steel Co. Ltd. and others, (2002) 9, Supreme Court Cases, 520. This clearly establishes that Hon’ble the Supreme Court is itself has expressed its doubt about the application of the principle laid down in the earlier order in San-A Trading Company’s case (supra). In the case of SBP & Co. Vs. Patel Engineering Ltd. and another, (2005) 8, SCC, 618, a Constitution Bench of the Hon'ble Supreme Court was considering the scope of Section 11 (6) of the Conciliation Act. While considering the various issues, Hon'ble the Supreme Court held as under:- “45. It is seen that some High Courts have proceeded on the basis that any order passed by an Arbitral Tribunal during arbitration, would be capable of being challenged under Article 226 or 227 of the Constitution. We see no warrant for such an approach. Section 37 makes certain orders of the Arbitral Tribunal appealable. Under Section 34, the aggrieved party has an avenue for ventilating its grievances against the award including any in-between orders that might have been CWP No.17753 of 2009 9 passed by the Arbitral Tribunal acting under Section 16 of the Act. The party aggrieved by any order of the Arbitral Tribunal, unless has a right of appeal under Section 37 of the Act, has to wait until the award is passed by the Tribunal. This appears to be the scheme of the Act. The Arbitral Tribunal is, after all, a creature of a contract between the parties, the arbitration agreement, even through, if the occasion arises, the Chief Justice may constitute it based on the contract between the parties. But that would not alter the status of the Arbitral Tribunal. It will still be a forum chosen by the parties by agreement. We, therefore, disapproves of the stand adopted by some of the High Courts that any order passed by the Arbitral Tribunal is capable of being corrected by the High Court under Article 226 or 227 of the Constitution. Such an intervention by the High Courts is not permissible. 47. (i) XX XX XX (ii) XX XX XX (iii) XX XX XX (iv) The Chief Justice or the designated Judge will have the right to decide the preliminary aspects as indicated in the earlier part of this judgment. These will be his own jurisdiction to entertain the request, the existence of a valid arbitration agreement, the existence or otherwise of a live claim, the existence of the condition for the exercise of his power and on the qualifications of the arbitrator or arbitrators. The Chief Justice or the designated Judge would be entitled to seek the opinion of an institution in the matter of CWP No.17753 of 2009 10 nominating an arbitrator qualified in terms of Section 11 (8) of the Act if the need arises but the order appointing the arbitrator could only be that of the Chief Justice or the designated Judge.” In view of the judgment in Paramjeet Singh Patheja's case (supra), Section 22 of the SICA is attracted even in respect of the arbitration proceedings. However, paragraph 45 of the judgment rendered in SBP & Co. Vs. Patel Engineering Ltd.'s case (supra), the petitioner is not entitled to invoke writ jurisdiction as a corrective measure in respect to the order passed by the Arbitral- Tribunal. In my considered opinion, the petitioner has to seek remedy under the provisions of the Arbitration and Conciliation Act in respect to the impugned order even if the same is in contravention to Section 22 of the SICA. In view of the above, this petition is accordingly dismissed with liberty to the petitioner to seek statutory remedy available under the provisions of the Arbitration and Conciliation Act. No costs. 27.04.2011 (PERMOD KOHLI) BLS JUDGE Note: Whether to be referred to the Reporter? YES