INTRODUCTION

The incorporation of a company is an artificial entity recognized by the law as a legal

person that exists independently with rights and liability. This means that a company
is treated as a separate person from its participants. It is owned by at least one
shareholder and managed by at least one director. This separate legal personality has
the consequence that a company has perpetual succession. The life of the company
is not affected by the death, disability, insolvency or disagreement of a shareholder.
Its existence is ended when it is wound up pursuant to the Companies Acts.The
shareholders may come or go the life of the company like an artificial person is least
affected by these changes. The liability of the shareholders is limited to the value of
the shares held by them, it means if a company fails to pay its obligations, the
personal properties of the shareholders cannot be sold for the settlement of business
debts.

A Company is an artificial person created by law which have many advantages

compare with other business structure. Firstly, a limited company has a legal
existence separate from management and its members. Secondly, the choice of
company names is restricted and, providing a chosen name complies with the rules,
no-one else can use it. The only protection for sole traders and partnerships is
trademark legislation. As a result, it can commence or defend legal proceedings in its
own name. Thirdly, the company has everlasting life. Directors, management and
employees act as agent of the company. If they leave, retire, die – the company
remains in existence. A company can only be terminated by winding up, liquidation
or other order of the courts or Registrar of Companies. Last but not least, the current
level of Corporation Tax is lower than income tax rate. Finally, the protection given by
limited liability is perhaps the most important advantage of incorporation. The
members’ only liability is for the amount unpaid on their shares. Since most private
companies issue shares as “fully paid”, if things go wrong, a members’ only loss is the
value of the shares and any loans made to the company. Personal assets are not put
at risk. The separate legal personality has encouraged commercial activities. The
separate legal personality makes companies become an attractive vehicle for
commercial ventures, as the liability rests with the company, rather than the
shareholders, directors, members or company officers. However, there are also many
disadvantages for company structure. As a result, it is necessary to analyse the
history of companies and the development of company law.
The Companies Act 2013 of India defines a company as-
A registered association which is an artificial legal person, having an
independent legal, entity with a perpetual succession, a common seal for its
signatures, a common capital comprised of transferable shares and carrying
limited liability.
Few points that should be noted in this definition:

Legal Person: A legal person could be human or a non-human entity which is

recognised by law as having legal rights and is subject to obligations.
A person or a group of persons: It is no more required to be an association of
persons to form a company. A company can also be started as a single
person company (one-person company).
Since the definition, features, characteristics, and types of companies differ in
different countries (especially in the United States), all the following sections
will be focused on an Indian and UK perspective of a company.
Features & Characteristics Of A Company
Incorporated association: A company comes into existence when it is
registered under the Companies Act (or other equivalent act under the law). A
company has to fulfil requirements in terms of documents (MOA, AOA),
shareholders, directors, and share capital to be deemed as a legal
association.
Artificial Legal Person: In the eyes of the law, A company is an artificial legal
person which has the rights to acquire or dispose of any property, to enter into
contracts in its own name, and to sue and be sued by others.
Separate Legal Entity: A company has a distinct entity and is independent of
its members or people controlling it. A separate legal entity means that only
the company is responsible to repay creditors and to get sued for its deeds.
The individual members cannot be sued for actions performed by the
company. Similarly, the company is not liable to pay personal debts of the
members.
Perpetual Existence: Unlike other non-registered business entities, a company
is a stable business organisation. Its life doesn’t depend on the life of its
shareholders, directors, or employees. Members may come and go but the
company goes on forever.
Common Seal: A company being an artificial legal person, uses its common
seal (with the name of the company engraved on it) as a substitute for its
signature. Any document bearing the common seal of the company will be
legally binding on the company.
Limited Liability: A company may be limited by guarantee or limited by
shares. In a company limited by shares, the liability of the shareholders is
limited to the unpaid value of their shares. In a company limited by guarantee,
the liability of the members is limited to the amount they had agreed upon to
contribute to the assets of the company in the event of it being wound up.

Types of companies
A company can be classified into various types depending upon the following
requirements:

Classification of Companies by Mode of

Incorporation
Royal Chartered Companies
These companies are formed under a special charter by the monarch or by a
special order of a king or a queen. Few examples of royal chartered
companies are BBC, East India Company, Bank Of England, etc.
Statutory Companies
These companies are incorporated by a special act passed by the central or
state legislature. These companies are intended to carry out some business of
national importance. For example, The Reserve Bank of India was formed
under RBI act 1934.

Registered or Incorporated Companies

These companies are formed/incorporated under the companies act passed
by the government. These companies come into existence only after these
are registered under the act and the certificate of incorporation is passed by
the Registrar of companies.

Classification of Companies based on the liability

of the members
The registered companies can be classified into the following categories
based on the liabilities of members:

Companies Limited By Shares

These companies have a defined share capital and the liability of each
member is limited by the memorandum to the extent of the face value of
shares subscribed by him.

Companies Limited By Guarantee

These companies may or may not have a share capital and the liability of
each member is limited by the memorandum to the extent of the sum of
money (s)he had promised to pay in the event of liquidation of the company
for payments of debts and liabilities of the company.

Unlimited Companies
There is no formal restriction to the amount of money that the
shareholder/member of the company has to pay in the event of the
liquidation of an unlimited company.

Classification of Companies based on The

Number of Members
Public Company (or Public Limited Company)
A public company is a corporation whose ownership is open to the public. In
other words, anyone can buy the shares of a public company. There are no
restrictions to the number of members of a public company or to the
transferability of shares. However, there are some other restrictions:

 (In UK) A public limited company should have at least 2 shareholders and
2 directors, have allotted shares to the total value of at least £50,000, be
registered with company house, and have a qualified company secretary.
 (In India) A public company should have at least 7 members and 3
directors, and issue a prospectus or file a statement in lieu of prospectus
with the Registrar before allotting shares.
Private Company (or Private Limited Company)
A private company cannot be owned by the public; it restricts the number of
members, the right to transfer its shares and prohibits any invitation to the
public to subscribe for any shares or debentures of the company.

(In UK) A private company is a separate legal entity with a suitable company
name, an address, at least one director, at least one shareholder, and
memorandum of association and article of association.

(In India) A private company is a separate legal entity with a suitable company
name, an address, at least 2 members and at most 200 members, and at least
two directors with one being an Indian resident.

One Person Company

A one-person company is an Indian private limited company which has only
one founder/promoter. The founder should be a natural person who is a
country resident. There is also a threshold of paid-up capital (₹ 50 lakh) and
average turnover (₹ 2 crores in 3 immediate preceding financial years) for a
one-person
 Case
Bhadresh Kantilal Shah vs Magotteaux International And ... on 16 December,
1999
Equivalent citations: 2002 111 CompCas 220 CLB
Bench: A Banerji, S Balasubramanian

ORDER S. Balasubramanian (Vice-Chairman)

1. The petitioner hereinabove, holding 49 per cent, shares in AIA Magotteaux Ltd. ("the
company"), has filed this petition under Section 397/402 and Section 403 of the
Companies Act, 1956 ("the Act"), alleging oppression in the affairs of the company.
Along with the petition, he also filed C. A. No. 237 of 1999 seeking certain interim
reliefs. Both the petition and the application were mentioned on September 17, 1999.
Directions were issued to the respondents to file their replies to the application and
hearing of the application was fixed on October 4, 1999. In the meanwhile, the first
respondent filed an application C. A. No. 248 of 1999 in terms of the provisions
of Section 45 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as
"the Arbitration Act"), on the ground that the disputes raised in the petition arise out of
and in connection with certain agreements entered into between the parties in which there
is an arbitration Clause for arbitration by the International Chambers of Commerce
("ICC") and as such the petition should be dismissed and the parties be referred to
arbitration. In the meanwhile, the second respondent had invoked the jurisdiction of the
ICC in terms of the arbitration Clause in the joint venture agreement. In view of this, the
petitioner filed C. A. No. 254 of 1999 seeking for staying the arbitration proceedings
before the ICC. Accordingly, both these applications were taken up for hearing.

2. Before we deal with the arguments of counsel, we shall narrate certain factual aspects.
A joint venture and shareholders' agreement ("the JVA") was entered into between the
petitioner and the first respondent on June 28, 1991, consequent to which the company
was incorporated. The company is not a party to this agreement. On the same day, three
other agreements --technical and financial collaboration agreement, trade mark licence
agreement--both between the first respondent and the company and a sole distributor
agreement between the second respondent and the company were entered into and were
annexed to the JVA. Later, a non-competition agreement was entered into between the
first respondent, the tenth respondent and the petitioner. A technical collaboration
agreement was entered into on July 1, 1994, between the first respondent and the ninth
respondent. Another technical collaboration agreement was entered into on November 22,
1996, between the first respondent and the eighth respondent. As per the JVA, the first
respondent was to have 51 per cent. and the petitioner 49 per cent. shares in the company.
The JVA also provided for the appointment of the petitione? as the managing director and
his continuance as such up to the age of 65. It also provided for affirmative votes by both
the groups on certain matters. Some of the terms of the JVA were to be incorporated in
the articles of the company. All these agreements, except the non-competition agreement,
provided for arbitration more or less in the following terms : "Notwithstanding Clause . ..
. any dispute, controversy claim arising out of or relating to this agreement or the breach,
termination or invalidity thereof shall be settled with arbitration, pursuant to the Rules of
Conciliation and Arbitration of the International Chamber of Commerce in the City of
London. The decision by arbitrators shall be final and conclusive and binding upon the
parties. Judgment upon any award rendered may be entered in any court having
jurisdiction thereof or application may be made to such court for a judicial acceptance of
the award and an order of enforcement as the case may be". The JVA also provided for
termination of the agreement in the case of default of one of the parties of its obligations
under the agreement, in which case, the non-defaulting party would have the option to
purchase the shares held by the defaulting party at the fair market value. In accordance
with the terms of the JVA, the present holding of the petitioner is 49 per cent. and that of
the first respondent 51 per cent. shares in the company. The petitioner was appointed as
the managing director and the terms of the Articles were amended to incorporate the
terms of the agreement as at annexure C to the JVA. Certain disputes seemed to have
arisen between the parties in the conduct of the affairs of the company culminating in the
filing of this petition.

3. We have, in this order, considered the arguments of counsel in three parts. The first
part--on the scope of Section 45 of the Arbitration Act, the second part--on C. A. No. 248
of 1999 filed by the first respondent (hereinafter referred to as the respondent) seeking for
referring the matter to arbitration and the third--on C. A. No. 254 of 1999 filed by the
petitioner seeking for staying the proceedings before ICC/restraining the first respondent
from further prosecuting the arbitration proceedings.

4. We shall first deal with, without reference to the facts of this case, the scope of the
provisions of Section 45 of the Arbitration Act and its applicability to the proceedings
under Section 397/398 of the Companies Act as that is the issue that has arisen on the
application filed by the respondent. Before we deal with the arguments of counsel in
detail on this issue, we may sum up their arguments in a nutshell, noting the fact that the
respondent has already initiated proceedings before the ICC in terms of the arbitration
Clause contained in the JVA. According to Shri Diwan, senior counsel for the respondent,
since the entire allegations in the petition arise out of and in connection with various
agreements entered into between the parties, all of which provide for arbitration in the
ICC, the Company Law Board is bound to refer the parties to arbitration in terms
of Section 45 of the Arbitration Act. According to Shri Chagla, senior counsel for the
petitioner, the question of referring the matter to arbitration does not arise for three main
reasons : that invoking the jurisdiction of the Company Law Board in the case of
oppression is a statutory right which cannot be taken out by the provisions of any other
law, that the Company Law Board is vested with exclusive powers to deal with matters of
oppression which cannot be delegated to a private forum and that the powers exercisable
by the Company Law Board under Section 402 of the Act are so wide and comprehensive
that these reliefs cannot be granted by an arbitrator and as such the question of referring
the parties to arbitration does not arise. In short, his contention is that Section 45 of the
Arbitration Act is not applicable to Section 397/398 proceedings. Both counsel relied on a
number of authorities to substantiate their stand.

5. Shri Diwan, initiating his arguments, submitted that the proceedings under Section
397/398, are no exception to the provisions of the Arbitration Act. As long as the
disputes/allegations raised in the petition arise out of or in connection with, an agreement
containing an arbitration clause, then, if it is domestic arbitration, the Company Law
Board is bound to refer the parties to arbitration in terms of Section 8 of the Arbitration
Act and in the case of foreign arbitration, under the provisions of Section 45 of that Act.
According to him these are mandatory provisions without any exception. He pointed out
that the Company Law Board itself had acted in terms of the binding nature of the
provisions of Section 45 of the Arbitration Act in Naveen Kedia v. Chennai Power
Generation Ltd. [1998] 4 Comp LJ 128 (CLB); [1999] 95 Comp Cas 640 in which, in
view of the arbitration Clause contained in the agreement providing for arbitration by
London Chambers of Commerce, the Company Law Board dismissed the petition since
all the disputes raised in the petition related to that agreement. Likewise, in Escorts
Finance Ltd. v. G. R. Solvents and Allied Industries Ltd. [1999] 96 Comp Cas 323 (CLB)
; [1999] 20 SCL 23, wherein the agreement between the parties provided for domestic
arbitration, the Company Law Board declined to entertain the petition on the ground that
the allegations were in relation to and arising out of the said agreement. He further
submitted that where the Company Law Board found that some of the allegations related
to an agreement providing for arbitration, it had declined to entertain those allegations
and kept for examination only the other allegations which were not related to arbitration
agreement. In this connection, he referred to the decisions of the Company Law Board in
20th Century Finance Corporation Ltd. v. RFB Latex Ltd. [1999] 97 Comp Cas 636
and Khandwala Securities Ltd. v. Kowa Spinning Ltd. [1999] 97 Comp Cas 632.

6. He submitted that in all the above four cases, the Company Law Board had examined
various cases cited in those proceedings and held that all those cases related to the
provisions of Section 34 of the Arbitration Act, 1940, in which discretion had been given
to a court to decide whether or not to refer the parties for arbitration and that such
discretionary power is no longer available to a court after the coming into effect of the
provisions of the Arbitration Act, which mandates a judicial authority to refer the parties
to arbitration once it is satisfied that the matter before the judicial authority is covered by
an arbitration agreement.

7. He countered the arguments of Shri Chagla that various courts have held that matters in
a winding up petition cannot be referred to arbitration since an arbitrator has no powers to
do so and as such, in the same manner, reliefs under Section 402 cannot also be granted
by an arbitrator. Shri Diwan submitted, relying on Pradeshiya Industrial and Investment
Corporation of U. P. v. North India Petro Chemicals Ltd. [1994] 79 Comp Cas 835 ;
[1994] 3 SCC 348, that in the case of a claim which is the subject matter of arbitration
requiring adjudication by the arbitrator, then, the court will not entertain a winding up
petition on the same issue. In the same way, as decided in Thakur Paper Mills v. Kailash
Chand Jain, AIR 1968 Patna 289 ; [1969] 39 Comp Cas 47, a winding up petition could
be admitted only when there is no bona fide dispute on the subject matter of the petition.
He also pointed out that even in a proceeding under Section 397/398, the Delhi High
Court itself referred the parties to arbitration in Gurnir Singh Gill v. Saz International (P.)
Ltd. [1987] 62 Comp Cas 197. Therefore, he submitted that just because an arbitrator
cannot grant the relief sought in a petition under Section 397/398, that does not mean that
the matters cannot be referred to arbitration if they directly arise out of or in connection
with an arbitration agreement. He further submitted that it is wrong to suggest that the
Company Law Board has the sole and exclusive jurisdiction to decide matters covered
under Section 397/398 as the Calcutta High Court in Pradip Kumar Sarkar v. Luxmi Tea
Co. Ltd. [1990] 67 Comp Cas 491 has held at page 512, that these Sections do not oust
the jurisdiction of the civil court to entertain suits on the same subject matter. If it is so,
then, learned counsel contended that an arbitrator can also entertain such complaints as
long as they arise out of or in connection with the arbitration agreement and grant
appropriate relief. For the same proposition that the jurisdiction of the civil court is not
barred, he relied on Marikar (Motors) v. M. I. Ravikumar [1982] 52 Comp Cas 362 (Ker).

8. He submitted that the relationship between the parties is of a commercial nature and
when the agreement resulting in such a relationship provides for arbitration in the case of
any differences arising out of such a relationship, then, the only course available is that
such differences should be referred to the arbitration as agreed upon. It is more so, in the
case of a foreign arbitration as held by the Supreme Court in R. M. Investment and
Trading Co. (P.) Ltd. v. Boeing Co. [1994] 80 Comp Cas 588 ; [1994] 4 SCC 541 in
which the Supreme Court taking this view, stayed the proceedings under Section 3 of the
Foreign Awards (Recognition and Enforcement) Act, 1961, pending the arbitration
proceedings. For the same proposition he relied on Svenska Handelsbanken v. Indian
Charge Chrome Ltd. [1994] 79 Comp Cas 589 ; [1994] 2 SCC 155 wherein at para. 43,
the apex court held that the right to foreign arbitration provided by Parliament is an
indefeasible right in which the court does not have any kind of discretion. He also pointed
out, referring to the Singaran Coal Syndicate Ltd. v. Balmakund Marwari, AIR 1931 Cal
772, wherein the court held that if matters which are agreed to be referred are mixed up in
an action with matters not agreed to be referred, there is no reason why the matters agreed
to be referred should not be referred for arbitration leaving the action to go on as to the
other matters. This principle, he submitted, had also been followed by the Company Law
Board itself in two of the cases referred to by him earlier. He further submitted that
reference to arbitration can be refused only when there are matters outside the arbitration
agreement or where fraud, falsification of documents or forgery is alleged or where the
claims of the plaintiff are based on matters foreign to the original agreement. He pointed
out that the Jammu and Kashmir High Court has taken a similar view in Union of India v.
Lakshmi Ice Factory, AIR 1964 J&K 10. Therefore, he submitted that the legal position is
if the parties had decided to choose their own forum consciously, then, the court is bound
to refer them to the forum chosen by them once it is established that the matters under
consideration arise out of and in connection with an arbitration agreement.

9. Referring to the decision of the Supreme Court in Haryana Telecom Ltd, v. Sterlite
Industries (India) Ltd. [1999] 97 Comp Cas 683 ; [1999] 5 SCC 688 on which Shri
Chagla heavily relied, to urge, that since the Supreme Court has laid down the law in that
case that matters in a winding up petition could never be referred to an arbitrator since the
arbitrator has no power to order winding up, similarly, matters covered under a Section
397/398 petition cannot also be referred to an arbitrator, Shri Diwan pointed out that the
Supreme Court has not laid down any such law or principle in this case and the
observation made therein was related only to the facts of that particular case and not as a
general proposition of law. He pointed out that the above case was an appeal against the
decision of the Division Bench of the High Court of Punjab and Haryana reported
in Haryana Telecom Ltd, v. Sterlite Industries (India) Ltd. [1999] 97 Comp Cas 675 ;
[1999] 3 Comp LJ 91. The Supreme Court did not examine the issue as to whether as a
principle of law, matters in a winding. up petition could or could not be referred to
arbitration. Referring to Municipal Corporation of Delhi v. Gurnam Kaur [1989] 1 SCC
101; AIR 1989 SC 38, he submitted that in this case, the Supreme Court has laid down
the principles of interpretation of a judgment, wherein it has held that pronouncement of
law which are not part of the ratio decidendi are classed as obiter dicta and not
authoritative. In the Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd. [1999] 97
Comp Cas 683 ; [1999] 5 SCC 688, there were no arguments on the powers of the court
to refer matters covered in a winding up petition to an arbitrator, as is evident from the
absence of any mention of such arguments in the judgment. Therefore, he contended, that
only in the facts of that case, the Supreme Court decided that an arbitrator cannot order
winding up of a company, the jurisdiction being exclusive to a court. A reading of the
High Court judgment, he pointed out, would reveal that in the case of bona fide disputes,
even matters covered in a winding up petition could be referred to arbitration. Since the
High Court found that there were no bona fide disputes, it allowed the winding up
petition. The Supreme Court also upheld the decision of the High Court observing that the
company had become commercially insolvent and, therefore, in the matters like this, the
company should be wound up. Having come fo the decision, the court had observed that
an arbitrator would have no jurisdiction to order winding up of a company. From the
reading of this judgment, he submitted that it would be apparent that the apex court had
not disagreed with the proposition of law as laid down by the Division Bench as indicated
earlier, stating that bona fide disputes, even in a winding up petition could be referred to
arbitration. In this connection, he also referred to Goetze India Ltd. v. Pure Drinks (New
Delhi) Ltd. (No. 1) [1994] 80 Comp Cas 340 ; [1999] 3 Comp LJ 68 (P & H) wherein
also, the same High Court has held that if there are bona fide disputes, then, even in
winding up proceedings, the matter could be referred to arbitration.

10. Referring to the contention of Shri Chagla that the word "action" used in Section
45 of the Arbitration Act would cover only matters which could be agitated in a civil
court either by way of a suit or writ and not proceedings under Section 397/398 of the
Act, Shri Diwan referred to Halsbury's Laws of England in which the word "action" has
been defined as "any civil proceedings commenced by a writ or any other manner
prescribed by rules of court. It has a wide signification as including any method
prescribed by those rules of invoking the court's jurisdiction for the adjudication or
determination of a lis or legal right or claim or any justiciable issue, question or contest
arising between two or more persons or affecting the status of one of them. In its natural
meaning 'action' refers to any proceeding in the nature of a litigation between a plaintiff
and a defendant". Thus, he submitted, that a proceeding under Section 397/398 is nothing
but a litigation and as such the term "action" would cover any proceeding initiated before
a judicial authority. He pointed out that this definition has been approved in Bharat Bank
Ltd. v. Ruby General Insurance Co. Ltd. [1951] 21 Comp Cas 40 ; AIR 1951 Punj 97.
Accordingly, he stated that it is wrong to suggest that the word "action" used in Section
45 of the Arbitration Act relates only to matters like suit or writ which could be instituted
in a civil court.

11. Summing up his arguments on the scope and application of the provisions of Section
45 of the Arbitration Act, Shri Diwan submitted that once it is established that the
allegations in the petition arise out of or in connection with an arbitration agreement
providing for foreign arbitration, the Company Law Board has no option but to refer the
parties to arbitration and this right view has already been taken by a two-member Bench
of the Company Law Board in Naveen Kedia's case [1999] 95 Comp Cas 640 and in the
case of domestic arbitration, the right view of referring the parties to arbitration in terms
of Section 8 of the Arbitration Act has again been taken by a two-member Bench of the
Company Law Board in three other cases. Therefore, he contended that the present Bench
consisting of two members cannot take a different view on this issue. Accordingly, he
submitted that as long as the disputes/allegations in the petition arise out of or in
connection with a foreign arbitration agreement, even in a proceeding under Section
397/398 of the Act, the Company Law Board is bound to refer the parties to arbitration as
mandated by Section 45 of the Arbitration Act.

12. Shri Subramanian, advocate, supplemented the arguments of Shri Diwan that we
should refer the matter to arbitration by citing two Supreme Court cases wherein the apex
court has held that if it is necessary to take recourse to the terms of the contract for the
purpose of deciding the matter in dispute, then, it must be held that the matter is within
the scope of the arbitration Clause and the arbitrator has the jurisdiction to decide that
dispute (Union of India v. Salween Timber and Construction Co., (India), AIR 1969 SC
488), and once the dispute is found to be within the scope of the arbitration clause, it is no
part of the province of the court to enter into the merits of the dispute (A. M. Mair and
Co. v. Gordhandas Sagarmull, AIR 1951 SC 9).

13. Shri Chagla, initiating the arguments on this issue, submitted that Section 45 of the
Arbitration Act covers only civil suits/writs, as is evident from the word "action" as used
in that Section and does not cover matters like matrimonial disputes, allegations of
oppression, etc. He also pointed out that Section 45 of the Arbitration Act is not a non
obstante Section as is evident from the beginning of the section, which reads
"Notwithstanding anything contained in Part 1 or in the Code of Civil Procedure, 1908".
Thus, it does not exclude the provisions of other Acts or statutes. The right under Section
399 to file a petition under Section 397 for relief against oppression is a statutory right
conferred by the Act and as such not covered under the provisions of Section 45 of the
Arbitration Act unlike other common law rights. Further, the reliefs under Section 402 of
the Act cannot be granted by an arbitrator. As a matter of fact, he submitted, that for
application of Section 45, the subject matter of dispute should be capable of being settled
by the arbitrator as provided, in Article 2(1) of First Schedule to the Arbitration Act.
Unless and otherwise a judicial body is satisfied that the arbitrator is capable of settling
the dispute, the question of referring the matter to arbitration under Section 45 of the
Arbitration Act does not arise. Even Section 44 of the Arbitration Act speaks of only
disputes of commercial nature while under Section 397, the acts complained of are in the
nature of oppressive actions and has nothing to do with commercial relationship. The
provisions of Section 397 are not invoked for the personal benefit of a shareholder but for
the benefit of the company as well as a large body of shareholders in the representative
capacity. Since the provisions of Section 397/398 are an exception to the rule of majority,
the forum designated for looking into allegations of oppression alone has the jurisdiction
to deal with the same and not a private forum agreed upon by the parties. He pointed out
that the power of an arbitrator is limited to settling the disputes between the parties and he
cannot provide the relief to put an end to the acts of oppression unlike the Company Law
Board which has wide powers under Section 402 of the Act unlimited by the other
provisions of the Act (Bennet Coleman and Co. v. Union of India [1977] 47 Comp Cas 92
(Bom)). He further stated that an arbitrator cannot invoke the provisions of Section 406 of
the Act while the Company Law Board can do so in a Section 397/398petition. He
supplemented this argument by referring to Cosmosteels (P.) Ltd. v. Jairam Das
Gupta[1978] 48 Comp Cas 312 ; AIR 1978 SC 375, wherein the court held that in the
case of ordering purchase of shares held by the shareholders by the company in
proceedings under Section 397/398, there is no need to follow the provisions of Sections
100 to 104 of the Act. For the proposition that no civil court can have jurisdiction in a
matter of allegations of oppression and mismanagement under Section 397/398, he cited
the case of Pijush Kant Guha v. West Bengal Pharmaceuticals and Phyto Chemical
Development Corporation Ltd. [1982] 1 Comp LJ 199 (Cal); AIR 1982 Cal 94. For the
proposition that Company Law Board has wide powers to give directions even contrary to
the provisions of articles, he relied on Kishore Y. Patel v. Patel Engineering Co. Ltd.,
AIR 1992 Bom 114 ; [1994] 79 Comp Cas 53. For the proposition that the role of an
arbitrator is limited and that he cannot grant the reliefs provided by designated
adjudicating bodies, he relied on Chiranjilal Shrilal Goenka v. Jasjit Singh [1993] 2 SCC
507 wherein the apex court held that in matters of probate, only the probate court has
exclusive jurisdiction and an arbitrator, even with the consent of the parties, has no
jurisdiction to adjudicate upon the proof or validity of the will propounded by the
executor. He further submitted that in Section 397/398 proceedings, the reliefs are granted
on just and equitable grounds while in the case of arbitration it is purely based on legal
grounds in terms of the agreement. In other words, he submitted that when the reliefs
sought are on equitable grounds, the question of referring the matter to arbitration does
not arise. For the exclusive jurisdiction of the Company Law Board in the matter of
oppression, since it is a special Tribunal created by the statute, he relied on Premier
Automobiles Ltd. v. Kamlekar Shantaram Wadke, [1975] 48 FJR 252 ; AIR 1975 SC
2238, wherein the court held that if an industrial dispute relates to the enforcement of a
right or an obligation created under the Act, then, the only remedy available to the suitor
is to get an adjudication under the Act and only the Industrial Tribunal created under the
Act and not a civil court will have jurisdiction. In this connection, he also referred
to Muddada Chayanna v. Karnam Narayana, AIR 1979 SC 1320, wherein the court held
(page 1324): "Where a special Tribunal, out of the ordinary course is appointed by an Act
to determine questions as to rights which are the creation of that Act, then, except so far
as is otherwise expressly provided or necessarily implied, that Tribunal's jurisdiction to
determine those questions is exclusive." In view of this, he urged that since the Company
Law Board has been created under the Companies Act to deal with matters of oppression,
then, only the Company Law Board will have exclusive jurisdiction to deal with the
matter and not any other forum including an arbitrator.

14. In this connection, he also referred to Section 9 of the Companies Act according to
which the provisions of the Act override the memorandum and articles or any agreement
and any provision repugnant to the provisions of the Act would be void. Therefore, when
the right to move the Company Law Board has been statutorily conferred by the Act on a
shareholder, such a right cannot be taken away by an agreement to refer the disputes to
arbitration as such an agreement would be void in terms of Section 9 of the Act. In this
connection, he relied on Surendra Kumar Dhawan v. R. Vir [1977] 47 Comp Cas 276
(Delhi) and O.P. Gupta v. Shiv General Finance (P.) Ltd. [1977] 47 Comp Cas 279
wherein the Delhi High Court held that arbitration Clause in the articles of association
was void in view of the provisions of Section 9 of the Act and as such the court would not
stay the proceedings under Section 397/398 of the Act on the ground that the articles
provided for arbitration in the case of disputes between the shareholders. On the exclusive
jurisdiction of the Company Law Board in matters covered under Section 397/398, he
drew an analogy of the powers of the company court under Section 155 of the Act to state
that Supreme Court in Ammonia Supplies Corporation (P.) Ltd. v. Modern Plastic
Containers Pvt. Ltd. [1998] 94 Comp Cas 310 ; [1998] 7 SCC 105 has held that only the
company court under Section 155 of the Act will have exclusive jurisdiction and the
jurisdiction of the civil court will be impliedly barred.

15. Taking up the decision of the Supreme Court in Haryana Telecom Ltd.'s case [1999]
97 Comp Cas 683, he submitted, that the Supreme Court has laid . down the law that a
winding up petition cannot be referred to an arbitrator inasmuch as he is incapable of
ordering winding up of a company, the jurisdiction of which is exclusively vested in the
High Court. He countered the arguments of Shri Diwan that this decision was applicable
only to the facts of that case. It is evident from that case, he submitted, that once a
particular relief as provided for by the statute cannot be granted by an arbitrator, then, the
matter cannot be referred to him as in this case the Supreme Court has observed (page
685) : "This, however, postulates, in our opinion, that what can be referred to the
arbitrator is only that dispute for matters which the arbitrator is competent or empowered
to decide". Since the proceedings under Section 397/398 are alternative to winding up
proceedings, the same principles of law as applicable to winding up proceedings should
apply to the proceedings under Section 397/398 of the Act and since the apex court has
held that winding up matters cannot be referred to arbitration, proceedings under Section
397/398 also cannot be referred to arbitration.

16. Shri Sarkar, senior advocate, appearing for respondent No. 8, while concurring with
the arguments of Shri Chagla, submitted that the provisions of Section 397/398 are
beneficial provisions to protect the interest of the shareholders, the company and the
public interest and as such are not amenable to arbitration. In between a contractual forum
and a statutory forum, it is the latter which would prevail. When the allegations are that
there have been acts of oppression and consequent wrongful acts against the shareholders
and the company, the only remedy provided by the statute is to approach the Company
Law Board under Section 397/398 of the Act and the powers of the Company Law Board
cannot be delegated by an agreement by the parties to a private forum. He further
submitted that, earlier, a composite petition under Section 397/398 and Section
433(f) could be filed and in view of the Supreme Court decision in Haryana Telecom
Ltd.'s case [1999] 97 Comp Cas 683, the matter would have been heard by the court
without being referred to arbitration. Just because, the Company Law Board has been
designated now to deal with the matters under Section 397/398, the Company Law Board
cannot take a different view. Referring to World Wide Agencies (P.) Ltd. v. Margaret T.
Desor (Mrs.) [1990] 67 Comp Cas 607 ; AIR 1990 SC 737, he submitted that in that case
the Supreme Court held that a combined petition under Section 397/398 and Section
433(f) could be filed. Referring to the decisions of this Board cited by Shri Diwan, Shri
Chagla submitted that the decision of the apex court in Haryana Telecom Ltd.'s case
[1999] 97 Comp Cas 683 should be deemed to have overruled the decisions of this Board.
Therefore, according to him in line with the Supreme Court decision in Haryana Telecom
Ltd. 's case [1999] 97 Comp Cas 683, the Company Law Board should dismiss the
application filed by the respondent for referring the matter to arbitration and the Company
Law Board should proceed with the petition.
17. We have considered the arguments of counsel. From the arguments of counsel, it
emerges that the contention of Shri Diwan is that, in terms of Section 45 of the
Arbitration Act, the Company Law Board is bound to refer the matter to arbitration while
the contention of Shri Chagla is that matters covered under Section 397 of the Act are an
exception to the provisions of Section 45. Section 45 of the Arbitration Act reads as
follows :

"Power of judicial authority to refer parties to arbitration.--Notwithstanding anything

contained in Part 1 or in the Code of Civil Procedure, 1908 (5 of 1908), a judicial
authority, when seized of an action in a matter in respect of which the parties have made
an agreement referred to in Section 44, shall, at the request of one of the parties or any
person claiming through or under him, refer the parties to arbitration, unless it finds that
the said agreement is null and void, inoperative or incapable of being performed."

18. Since Section 44 has been referred to in the above section, we shall extract Section
44 also, which reads as follows :

Definition. --"In this Chapter, unless the context otherwise requires, 'foreign award'
means an arbitral award on differences between persons arising out of legal relationships,
whether contractual or not, considered as commercial under the law in force in India,
made on or after October 11, 1960 : (a) in pursuance of an agreement in writing for
arbitration to which the convention set forth in the First Schedule applies, and (b) in one
of such territories as the Central Government, being satisfied that the reciprocal
provisions have been made may, by notification in the Official Gazette, declare to be
territories to which the said convention applies."

19. Since Shri Chagla referred to Article II of Schedule I to the Arbitration Act in terms
of Section 44, we shall extract the same :

"Each contracting State shall recognize an agreement in writing under which the parties
undertake to submit to arbitration all or any differences which have arisen or which may
arise between them in respect of defined legal relationship, whether contractual or not,
concerning a subject-matter capable of settlement by arbitration."

20. It is to be noted that this Board has decided, at least in four cases, which have all been
cited by Shri Diwan that in view of the mandatory provisions of Section 8 and Section
45 of the Arbitration Act, once it is established that the matters agitated in a Section
397/398 petition arise out of or in connection with an arbitration agreement, then, the
Company Law Board has to refer the parties to arbitration. To take a different view in the
instant case, there have to be persuasive materials in the form of new points of law not
considered in those orders or decisions of a higher forum like a High Court or Supreme
Court contrary to the decision taken by this Board. Now we shall analyse the various
issues raised by Shri Chagla, including the Haryana Telecom Ltd.'s case [1999] 97 Comp
Cas 683, to examine as to whether the decision of this Board requires . reconsideration.
The point urged by him, in a nutshell, is that the proceedings under Section 397/398 are
outside the purview of Section 45 of the Arbitration Act for the following reasons :
--that matters which could be agitated in a suit/writ in civil courts alone would be
governed by Section 45 in view of the term "action" used in that section.

--that the right under Section 399 is a statutory right.

--that only a forum created by a statute could have jurisdiction on rights created by that
statute.

--that an arbitrator cannot grant the reliefs envisaged under Section 402.

--that a statutory forum has precedence over a private forum.

--Section 9 of the Companies Act is a bar to take away the statutory right by an
agreement.

--and that in the same analogy that winding up petitions cannot be referred to arbitration,
petitions under Section 397/398 cannot also be referred to arbitration.

21. He cited a number of authorities in support of his arguments. In Naveen Kedia's case
[1999] 95 Comp Cas 640, this Board had examined many of the issues now raised by Shri
Chagla and came to the conclusion (pages 652-53): "Having held that the matter before us
is covered by arbitration, the next issue for consideration is whether we are bound to refer
the parties to arbitration in terms of Section 45 of the Arbitration Act. The stand taken by
the petitioners to advance their arguments that we should not refer the matter to
arbitration, is two fold. One is that as a specially constituted Tribunal with wide powers to
grant various reliefs to put an end to the acts complained of, to come before which is a
statutory right has been conferred on shareholders, the Company Law Board cannot
abdicate its jurisdiction and confer the same on a private forum. The other ground is that a
private forum, namely, in this case, the arbitrator, cannot grant the reliefs as sought for by
the petitioners which can only be granted by us by virtue of the provisions of Section
402 of the Companies Act. Mr. Singh relied on a number of cases, which we have already
indicated earlier, to state that matters under Section 397/398cannot be matters for
arbitration. In all these cases, the issue that arose was whether a proceeding under Section
397/398 or proceedings for winding up could be stayed on account of either an agreement
between the shareholders for referring the disputes to arbitration or by virtue of the
provisions of Articles of association to that effect. It is well known that, to stay or not to
stay the proceedings under Section 34 of the Arbitration Act, when a plea of arbitration is
taken, was solely within the discretion of the court before which such a plea was taken.
While in the cases cited by Shri Singh, the courts had refused to exercise their discretion
to stay the proceedings, in the cases cited by Shri Sarkar, the courts exercised the
discretion to stay the proceedings. However, after the coming into force of the Arbitration
and Conciliation Act, 1996, the legal position has changed, more particularly, with
reference to foreign arbitration. Now it is mandatory, by virtue of Section 45 of this Act,
that a judicial body will have to refer the parties to arbitration once it is seized of an
action in respect of which the parties have made an agreement for arbitration to which the
convention in the First Schedule to the Act applies (Foreign Arbitration). The ingredients
of this Section are: a judicial authority should be seized of an action in the matter of
which the parties have made an agreement for arbitration ; one of the parties should make
a request for referring the parties to arbitration and that the judicial body does not find
that the said agreement is null and void, inoperative or incapable of being performed. The
Company Law Board is a judicial authority and this fact is not controverted. It has been
seized of a matter in which, as elaborated earlier, there is an agreement between the
parties for arbitration. The petitioners did not advance any arguments to convince us that
the agreement is null and void, inoperative or incapable of being performed. They have
only taken a stand, in reply to the application, that referring the matter to arbitration
would be expensive, time-consuming and would require transfer of documents from India
to London for production as evidence. This stand, according to us, would not make the
agreement inoperative or incapable of being performed. Thus, all ingredients of Section
45 of the Arbitration and Conciliation Act, 1996, are present. Once it is so, we feel that
there is no further scope for us to take into consideration the arguments of Shri Singh
about the statutory rights of the shareholders to move the Company Law Board, and that a
specially constituted Tribunal cannot abdicate its jurisdiction, etc. We have to do what the
law mandates us to do. Section 45 requires us to refer the parties to arbitration and we
have no discretion in this matter". There are certain new points raised by Shri Chagla
which were not considered in Naveen Kedia's case [1999] 95 Comp Cas 640 (CLB). They
are, that the proceedings under Section 397/398 are alternative to a winding up petition
and since the Supreme Court has held in Haryana Telecom Ltd.'s case [1999] 97 Comp
Cas 683 that winding up matters cannot be referred to an arbitrator, similarly Section
397 proceedings also cannot be referred to arbitration, that Section 45 deals only with
matters which could be agitated in a suit, that only disputes of commercial nature can be
referred to arbitration, that the only matters which could be agitated in a civil court could
come under the purview of Section 45, etc.

22. He also submitted that the arbitration agreement, providing for taking away the right
of the petitioner, created under the Act, to move the Company Law Board is contrary to
the provisions of Section 9 of the Act. In this connection, we may refer to the observation
of this Board in 20th Century Finance Corporation Ltd.'s case [1999] 97 Comp Cas 636
wherein it is observed (page 640): ". .. Shri Dholakia referred to Section 9 of the Act to
state that no provision of any agreement can take away the statutory rights conferred by
the Companies Act and he also relied on a Delhi High Court case in this regard. Section
9 of the Act deals only with memorandum, Articles or any agreement or any resolution
which are repugnant to the provisions of the Act and does not deal with the provisions of
other statutes. As a matter of fact Section 5 of the Arbitration Act which reads.
'Notwithstanding anything contained in any other law for the time being in force, in
matters governed by this part, no judicial authority shall intervene except where so
provided in this Act' makes it clear that in the case of an arbitration agreement, a judicial
authority cannot intervene except as provided in the Arbitration Act, notwithstanding
anything contained in any other law .... In other words, Section 9 of the Act does not
affect a right of a shareholder to invoke the provisions of Section 8 of the Arbitration Act
in case there is an agreement to refer the disputes to arbitration". Thus, it is clear that the
provisions of the Arbitration Act," have overriding effects on the provisions of Section
9 of the Companies Act.

23. Shri Chagla heavily relied on the judgment of the apex court in Haryana Telecom
Ltd.'s case [1999] 97 Comp Cas 683, for the proposition that, in that case, the court has
laid down the law that winding up matters cannot be referred to an arbitrator since he is
incapable of ordering winding up. In this connection, we are inclined to agree with Shri
Diwan that the decision in'that case was only with reference to the facts of that case and
not as a general proposition of law. It is to be noted that the Supreme Court considered
the issue on an appeal against the judgment of the Division Bench of the Punjab and
Haryana High Court. A reading of that judgment would reveal that it is that court which
had laid down the proposition of law as can be seen from para. 12 of the judgment which
reads as follows (page 683 of 97 Comp Cas --High Court case) : "Therefore, it must be
treated as a settled proposition of law that the arbitration Clause does not ipso facto oust
the jurisdiction of the company court to entertain a winding up petition and the party
invoking the arbitration Clause for making a request to the company court to refer the
matter to arbitration must satisfy the said court that there is a bona fide dispute between
the parties to the agreement which requires reference to the arbitrator, and it is not
sufficient for the applicant to say that the court should refer the matter to the arbitration
because there is a Clause in the agreement for making reference to the arbitrator". In this
case, the High Court has also referred to the judgment of the same court in Goetze India
Ltd.'s case [1994] 80 Comp Cas 340 (P & H) wherein the court has held that if the party
making the application under Section 34 of the old Act is in a position to establish that
there are bona fide disputes, then the court had the discretion to stay the proceedings in a
winding up petition. From these decisions, it emerges that if the party seeking reference to
arbitration is in a position to establish that there is a bona fide dispute between the parties
which requires reference to the arbitrator, then, the court would refer the matter to
arbitration. In the Supreme Court judgment, we are not able to find anywhere that the
Supreme Court had taken a different view from that of the High Court. As a matter of fact
the Supreme Court in para. 4 has observed (page 685 of 97 Comp Cas) : "This, however,
postulates, in our opinion, that what can be referred to arbitrator is only that dispute or
matter which the arbitrator is competent or empowered to decide". Having observed so, in
para. 5, the Supreme Court has held that since the company had become commercially
insolvent, it should be wound up and that an arbitrator would have no jurisdiction to order
winding up of a company. Normally, an observation of a court on a point of law, unless
made after detailed examination of the same, cannot be considered to be a ratio deci-
dendi. In this case, a reading of the judgment would show, that there is no discussion, as a
point of law, as to whether, winding up proceedings are outside the scope of Section
8 or Section 45 of the Arbitration Act. Therefore, we have no hesitation to hold that the
observation of the apex court in Haryana Telecom Ltd.'s case [1999] 97 Comp Cas 683
was specific to that case and not to be taken as a binding decision to be applied in all
winding up proceedings, when the issue of arbitration is raised. Our line of reasoning in
this regard conforms to the principles laid down by the Supreme Court in Municipal
Corportion of Delhi v. Gurnam Kaur [1989] 1 SCC 101; AIR 1989 SC 38, cited by Shri
Diwan in regard to interpretation of judgments. Even assuming, for argument's sake, that
the Supreme Court has laid down the law, yet it is to be noted, that the same is with
reference to winding up proceedings and not with reference to proceedings under Section
397/398. These proceedings are diametrically opposite to winding up proceedings. The
death of a company is the result of a winding up order, while in a Section
397/398 proceedings, the result is the continued survival of a company. That is why, the
Company Law Board has to come to the conclusion that there are just and equitable
grounds for winding up of the company, but the same would not be in the interests of the
shareholders. The reliefs to be granted under Section 402 depend on the facts of a case,
ensuring that such reliefs would put an end to the acts complained of. Thus, the principles
to be applied to a winding up proceedings cannot be straightaway applied to proceedings
under Section 397/398. In this connection, the decision of this Board in Dipak G. Mehta
v. Anupar Chemicals (India) (P.) Ltd. [1999] 98 Comp Cas 575 may be referred to. In that
case, the petitioners had filed a petition before the Bombay High Court for winding up of
the company under Section 433(f) of the Act. The same was dismissed on the ground that
there were no just and equitable grounds to wind up the company. Later the petitioners
filed a petition, more or less on the same grounds, under Section 397/398 of the Act. The
respondents took a stand that since the Bombay High Court had dismissed the winding up
petition on the finding that there were no just and equitable grounds, the Company Law
Board could not consider the petition. This Board, after observing (page 598 of 98 Comp
Cas) : "Since Section 397/398 proceedings are alternative to a winding up proceedings, it
is not that only those grounds which are considered to be just and equitable in a winding
up proceedings, could be the grounds in a Section 397/ 398 petition. In the Bombay
proceedings, the court held that since there was no deadlock in the management, the
company could not be wound up on just and equitable grounds. It did not examine
whether allegations of oppression had been established. That is why, the court itself
suggested that the petitioners may initiate the present proceedings under Section 397/398"
gave various directions with a view to put an end to the matters complained of. This order
of the Board was taken on appeal to the same High Court, and the High Court upheld the
order of the Company Law Board. Thus, it is not necessary that the principles applicable
to winding up petitions ipso facto are applicable to a proceeding under Section 397/398.

24. Another point raised by Shri Chagla has been that an arbitrator is incapable of
granting the reliefs as provided for in Section 402 of the Act. In regard to this argument,
no doubt the Company Law Board has vast powers under Section 402 of the Act, yet,
granting of relief depends on the facts of a particular case and if for granting the relief,
determination of bona fide disputes is required and the same is covered by an arbitration
agreement, then, it is for the arbitrator to decide these issues and not the Company Law
Board. In this connection we may also refer to the Delhi High Court judgment in Gurnir
Singh Gill's case [1987] 62 Comp Cas 197. In this case, the court itself, as pointed out by
Shri Chagla, in exercise of the powers under Section 402, referred the parties to
arbitration. It did so because, in the facts of that case, it felt that the reliefs justified in that
case could be granted by the arbitrator notwithstanding the fact that the powers
under Section 402 are very wide. This case settles the claim of Shri Chagla that since an
arbitrator cannot grant the relief provided for under Section 402, the matter cannot be
referred to arbitration. Granting of relief in proceedings under Section 397/398 is
discretionary depending on the facts of a case. If the Company Law Board comes to a
conclusion that appropriate relief justified in a particular case can be granted by an
arbitrator, then, there is no reason why the matter cannot be referred to arbitration. In
other words, even in a Section 397/398 petition, if the party applying for referring the
matter to arbitration is in a position to establish that there are bona fide disputes arising
out of and in connection with an arbitration agreement, and that the arbitrator could settle
the disputes by appropriate reliefs, then, the Company Law Board will have to refer the
parties to arbitration in terms of Section 8 or Section 45, as the case may be, of
the Arbitration Act. Perhaps, that is the reason why Section 34 of the Arbitration Act of
1940 provided for staying of the proceedings but presently in terms of section
8 and Section 45 of the Arbitration Act, such a stay of proceedings is not possible other
than referring the parties to arbitration.
25. In regard to the claim of Shri Chagla that a statutory right created under the Act could
only be adjudicated by the specialized forum created under that Act, both counsel have
cited authorities taking different views on the subject and it is not necessary to refer to
them again other than referring to the Supreme Court decision in a case (unreported
judgment in Civil Appeal No. 7055 of 1996, dated April 10, 1996-SC) referred to by this
Board, in Naveen Kedia's case [1999] 95 Comp Cas 640 in which matters covered in a
petition under Section 111 of the Act, seeking rectification of the register of members,
were directed to be referred to arbitration by the Supreme Court, in view of the agreement
between the parties in terms of Section 45 of the Arbitration Act. Therefore, just because
the Company Law Board has been constituted by the Act to have exclusive jurisdiction, it
does not mean that the provisions of Section 45 are not applicable to the proceedings
before it.

26. The next issue raised by Shri Chagla is that Section 45 covers only those matters
which could be agitated in suits/writs and not the proceedings under Section 397/398, in
view of the term "action" used in that section. In other words, according to him, only
matters which could be agitated in civil courts could be covered under Section 45. We
feel that this particular word cannot be considered in isolation, without reference to the
preceding words "a judicial authority, when seized of". The words "judicial authority"
have been used in the entire Act, only in Sections 5, 8 and 45. In other sections, only the
word "court" has been used. If the contention of Shri Chagla that the term "action" would
mean only suits/writs, which have necessarily to be instituted only before a court, the
Legislature could have used the word "court" in Section 45, instead of "judicial
authority". In that case, an issue that would have come up for examination is, whether the
Company Law Board is a court for the purposes of Section 45. Thus we are of the view,
that by using the words "judicial authority" in Section 45, the Legislature has actually
enlarged the scope of the word "action" and has not restricted to suits/writs.
Further, Section 44 talks of differences arising out of legal relationship considered to be
commercial under the law of India. This being the position, any dispute arising out of the
legal relationship of a commercial nature would give rise to initiate an action. It is how
even Halsbury's Laws of England defines the term "action". Section 41 of the Companies
Act provides that, to become a member of a company, one has to agree in writing and it is
a settled principle of law that the covenants of the Articles bind a member as if there is a
contract between him and the company. In this connection, we may also refer to Section
36 of the Companies Act. Such an implied contract is nothing but commercial and once a
person becomes a member of a company, legal relationship is established between the
company and the member. Thus when a member exercises his right arising out of such
relationship in filing a petition under Section 397/398, the same would fall within the
term "action".

27. Thus, we are not in a position to agree with Shri Chagla that, proceedings
under Section 397/398are outside the purview of Section 45 of the Arbitration Act. Such
a situation would completely nullify the object of the Act, as, it is quite possible that, in a
given case, to avoid arbitration on disputes squarely traceable to the terms of an
arbitration agreement, one can initiate a proceeding under Section 397/398 and claim that
provisions of Section 45 have no application. In the same way, one could ask for referring
the parties to arbitration merely on the ground that there is an arbitration agreement
between the parties even though the disputes may be outside the scope of the agreement,
just to defeat the judicial proceedings. That is why Section 45 stipulates satisfaction of
certain requirements for referring the parties to arbitration.

28. We shall now summarize our findings on the various issues raised before us on the
scope and application of Section 45 of the Arbitration Act vis-a-vis proceedings
under Section 397/398 :

--the right to file a petition under Section 397/398 arises out of commercial relationship
between a shareholder and the company ;

--the word "action" would cover a proceeding under Section 397/398 ;

--while considering a petition under Section 397/398, the Company Law Board is seized
of an action ;

--proceedings under these Sections are not outside the purview of Section 45 of the
Arbitration Act;

--the principles applicable to a winding up proceeding, need not necessarily apply to a

proceeding under Section 397/398 ;

--the provisions of the Arbitration Act are not repugnant to the provisions of Section 9 of
the Companies Act;

--once the Company Law Board is convinced that the matters governed in a petition
under Section 397/398 of the Act relate to or arise out of or in connection with an
arbitration agreement and that the reliefs appropriate to the facts of the case could be
determined/granted by an arbitrator, then, the Company Law Board is bound to refer the
matter to arbitration in terms of the mandatory provisions of Section 45 of the Arbitration
Act provided that the agreement is not null and void, inoperative or incapable of being
performed ;

--if any of the requirements of Section 45 is not satisfied, then the Company Law Board
can decline to refer the parties to arbitration ;

--the judicial authority has to prima facie, come to the conclusion, that the requirements
of Section 45have been fulfilled, before referring the parties to arbitration.

29. Having discussed the scope of Section 45 and having come to the decision that there
is no bar in referring the matters covered under Section 397/398 to arbitration depending
on the facts of a case, we shall deal with the instant application under Section 45 of the
Arbitration Act.

30. Shri Diwan submitted, that it is the petitioner who is in the management of the
company in his capacity as the managing director and as such his filing this petition
alleging oppression against himself being the single shareholder other than the respondent
does not arise. Further, he pointed out that all the complaints in the petition relate to the
arbitration agreements and as such arise out of and in connection with those agreements.
He submitted that at the time of entering into the JVA, the petitioner openly and without
reservation agreed to all the terms contained therein and as such he cannot now complain
that certain terms of the agreement are prejudicial to his interest or the company. The very
fact that he has not alleged that the agreement was entered into fraudulently or due to
undue influence or coercion, he is estopped from questioning the terms of the agreement.
He further submitted that most of the terms of the agreement relating to the affairs of the
company have been incorporated in the Articles of the company. He further submitted
that there are only two shareholders in the company and both were the signatories to the
JVA. The parties, on their own volition, agreed to refer the disputes arising out of the
agreement to arbitration by ICC. In other words, he submitted that ICC is the consensual
forum selected by the parties in their own wisdom. Going through the averments in the
petition and also the various reliefs sought for, he pointed out that the foundation of the
petition itself arises out of the various terms of the JVA and as such all the disputes in the
petition arise out of or in connection with the JVA in which there is an arbitration
agreement. He also pointed out that even though the company was not a party to the JVA,
yet, the company itself is the creation of the JVA and it has taken all benefits out of the
JVA including incorporating many of the terms of the JVA in the Articles and as such the
company not being a party to JVA is irrelevant. He further pointed out that the petitioner
has impleaded many unnecessary parties without any allegations against them or seeking
any relief against them. Accordingly, he submitted that his application should be allowed
and the petition be dismissed.

31. Shri Subramaniam, supplementing the arguments of Shri Diwan, submitted that even
though the company was not a party initially to the JVA, yet, later, through a subsequent
agreement dated January 14, 1998, at exhibit A-9 to the petition, the company had
adopted the JVA and the shareholders' agreement dated June 28, 1991, and as such the
same is binding on the company. He also went through the various reliefs sought in the
petition and pointed out that most of the reliefs sought are in relation to the terms of the
JVA or the other agreements, all of which contain an arbitration clause. He also stated
that to adjudicate on the disputes, recourse has to be taken to these agreements and if it is
so, then, it must be held that the matter is within the scope of the arbitration Clause and
that the arbitrator will have jurisdiction to decide those disputes as held in Union of India
v. Salween Timber and Construction Co. (India), AIR 1969 SC 488.

32. Shri Chagla, dealing with the application, submitted that, one of the important
requirements of Section 45 of the Arbitration Act is that all the parties before the
Company Law Board should be parties to the arbitration agreements. In the present case,
the company, in the affairs of which acts of oppression have been complained of, is not a
party to the JVA and in other agreements, the petitioner is not a party and as such the
main requirement of Section 45 for referring the matter to arbitration is absent. In this
connection, he referred to Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas
351; AIR 1965 SC 1535, in which the court held that a company not being a party to an
agreement is not bound by the same. He submitted that the disputes before the Company
Law Board are not private disputes between the shareholders but disputes relating to the
affairs of the company and the complaint of the petitioner is that by oppressive conduct,
the respondent, being the majority shareholder, is acting against the interest of the
company. No doubt, he submitted, that the petitioner with open mind entered into the
JVA but the bona fide expectations arising out of the JVA have been denied by the
respondents resulting in adverse impact on the fortunes of the company. In other words,
He contended that the conduct of the respondents is against the spirit of the partnership
principles under which the company was envisaged and incorporated. He submitted that
unilateral enforcement of the terms of the agreement has resulted in oppressive conduct
on the part of the respondent and the same is questioned in this petition. Thus, he
complained that the terms of the agreements are acting unequally in favour of one party.
He contended that the arbitrator would not be in a position to decide whether the
enforcement of the terms of the agreement is oppressive or not other than determining the
legality or otherwise of the agreement. In this connection, he referred to Sheth Mohanlal
Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [1964] 34 Comp Cas 777
(Guj); [1964] 1 Comp LJ 326 wherein it was held, that in a Section 397/398 petition it is
not the legality or otherwise of an action that is examined but only as to whether such
actions could be termed as oppressive or prejudicial to the interest of the company. He
referred to the decision of the Supreme Court in Needle Industries (India) Ltd. v. Needle
Industries Newey (India) Holdings Ltd. [1981] 51 Comp Cas 743 ; AIR 1981 SC 1298 in
which the court approved the decision of the House of Lords in Ebrahimi v. Westbourne
Galleries Ltd. [1973] AC 360 wherein Lord Wilberforce observed (page 379 of AC):
"The just and equitable provision does not, as the respondents suggest, entitle one party to
disregard the obligation he assumes by entering a company, nor the court to dispense him
from it. It does, as equity always does, enable the court to subject the exercise of legal
rights to equitable considerations; considerations, that is, of a personal character arising
between one individual and another, which may make it unjust, or inequitable, to insist on
legal rights, or to exercise them in a particular way" and stated that the Company Law
Board alone would be in a position to examine the provisions of the agreements on
equitable considerations and not the arbitrator. He again referred to Needle Industries
(India) Ltd.'s case [1981] 51 Comp Cas 743 wherein the Supreme Court has approved the
proposition as contained in Lindley on Partnership that (page 779): "the utmost good faith
is due from every member of a partnership towards every other member; and if any
dispute arises between partners touching on any transaction by which one seeks to benefit
himself at the expense of the firm, he will have to be required to show, not only that he
has the law on his side, but that his conduct will bear to be tried by the highest standard of
honour". Shri Chagla submitted that one of the main allegations in the petition is that, in
the guise of the JVA, the respondent is not allowing the company to export its products to
various countries and is routing the exports only through its own company without
disclosing the prices at which they are being sold and in the process of denying the
company the benefits of the best prices possible. This, even though, may be legal in terms
of the JVA, yet, it is a grave act of oppression against the shareholders and against the
interest of the company. This, he submitted, the arbitrator would not be in a position to
redress while the Company Law Board in exercise of its equitable jurisdiction would be
in a position to do. He further submitted that even though many of the terms of the JVA
were incorporated in the articles, yet, the arbitration Clause has not been incorporated and
as such cannot be enforced against the company. To support this argument, he relied on
the unreported decision of the Bombay High Court in Vijay Kumar Shankar Rao Thakur
v. Thakur Savadekar and Co. Ltd. (Company Petition No. 259 of 1992) wherein the court
held that no terms of agreement between shareholders would bind a company unless the
same are incorporated in the articles. For the same proposition, he relied on another
unreported decision of the Bombay High Court in the matter of Aditya Textile Industries
(P.) ltd. (Company Petition No. 339 of 1998) as also on V. B. Rangaraj v. V.B.
Gopalakrishnan [1992] 73 Comp Cas 201; AIR 1992 SC 453.

33. In the second paragraph of this order, we have summarised the factual aspect of this
case. The main acts of oppression alleged in this petition relate to the sole distribution
agreement by which all exports of the company are to be routed/effected through the
second respondent, termination of technical collaboration agreement with eighth
respondent (Welcast), depriving the company from obtaining local orders by counter
bidding by the first respondent in tenders floated by KIOCL, terminating the technical
collaboration agreement with the ninth respondent and non-implementation of an
agreement entered into between the respondent and the petitioner in Dubai on October 30,
1998.

On the basis of these allegations, the reliefs sought, inter alia, include cancellation and
termination of the sole distributor agreement, enforcement of the Dubai agreement,
equalisation of shareholding between the respondent and the petitioner, amendment to the
Articles and the JVA, ordering the first and second respondents to pay US Dollars 10
million by way of damages, directing the respondent from contending that the agreements
between respondents Nos. 8 and 9 have been terminated, appointment of an independent
chairman to preside over all general body meetings and the board meetings, and
permanent injunction restraining the first and second respondents from acting contrary to
the Dubai agreement, acting in violation of the JVA and other agreements entered into
along with the JVA, from competing with the company, respondents Nos. 8 and 9 in India
and ordering the first respondent to comply with the terms of the JVA and other
agreements to supply all technical know-how and technology to the company.

34. Even though there are 11 parties before us, the main parties are, the petitioner who
has filed this petition alleging oppression, the first respondent against which acts of
oppression are alleged and the company in the affairs of which oppression is
alleged. Section 2(l)(h) states that "party means a party to an arbitration agreement". It is
on record that all the three are not parties to all the agreements except to the non-
competition agreement, in the matter of which there is no allegation or relief sought. Thus
there is no commonality of parties in all these agreements. Since, as we have already
mentioned, there are only three main parties in the proceedings before us, and to invoke
the provisions of Section 45, the arbitration agreement should be among all these three
parties. It is evident from Section 45 which states "at the request of one of the parties" to
indicate that there should be commonality of parties to the proceedings before the judicial
authority and the agreement. We have already pointed out that there is only one
agreement among all the three, i.e., the noncompetition agreement. The main reliance of
the respondent in moving this application is by virtue of the JVA, which is only between
the petitioner and the first respondent. Shri Subramaniam pointed out that the company
has adopted the JVA in the agreement dated January 4, 1998, and as such it has become a
party to the JVA and, therefore, the same is binding on the company. We have seen the
agreement dated January 4, 1998. Even though, the petitioner has signed the agreement as
a director of the company, the agreement itself is only between the first respondent and
the company and in the preamble to the agreement reciting the parties, there is no mention
of the petitioner nor has he signed the agreement in his individual capacity as was done in
respect of the JVA. Instead of a tripartite agreement, it is a bipartite agreement. Mere
reference to other agreements in this agreement does not mean that the parties to the
earlier agreements are parties to this agreement. Since the petitioner is not a party to the
agreement dated January 4, 1998, he has every right to claim that the arbitration
agreement between him and the respondent cannot bind the company. Thus, our
observation that there is no commonality of parties to the present proceedings and the
agreements still holds good. Therefore, we are not in a position to hold that the company
is a party to the JVA. If so, then, as rightly pointed out by Shri Chagla, relying on Shanti
Prasad Jain's case [1965] 35 Comp Cas 351 (SC), an agreement, to which a company is
not a party, does not bind the company. In the said application, the first respondent has
also relied on the other agreements. As we have pointed out earlier, except in the case of
non-competition agreement, all the three parties who are the main parties before us are
not parties to those agreements. Thus, we find that there is no commonality of all the
three parties in all the agreements relied upon by the first respondent. When the
application of the provisions of a statute visits with certain disability on the rights of a
person, then the provisions of that statute have to be strictly construed. Section 45 talks of
parties having made an agreement, and if one applies for referring the matters to
arbitration, then, in both the legal proceedings and the agreement, the parties should be
common for the judicial authority to refer them to arbitration as per the arbitration
agreement. Since, the respondent has invoked the arbitration Clause in the JVA to which
the company is not a party, and other agreements to which the petitioner is not a party,
one of the main requirements of Section 45 of the Arbitration Act, of the parties being
common, has not been satisfied and as such we do not find any scope to allow C. A. No.
254 of 1999 and refer the parties to arbitration. Accordingly, this application is dismissed.
Since, we are dismissing this application on the lone ground of there being no
commonality of parties, we have not gone into the other issues argued by counsel for the
parties, including the main issue as to whether, the matter contained in the petition arises
out of or in connection with the arbitration agreements.

35. Having dismissed C. A. No. 254 of 1999 on the ground that there is no commonality
of parties to the arbitration agreements and the present petition, we shall deal with the
prayer of the petitioner to stay the proceedings before the ICC/restrain the respondents
from taking further steps in the ICC proceedings. Shri Chagla initiating arguments on this
issue, submitted that to avoid conflicting decisions, one by the Company Law Board and
the other by the ICC, the Company Law Board should invoke its inherent jurisdiction to
stay the arbitration proceedings. He submitted that, since the Company Law Board is a
court of equity, justice and honour, by exercising its just and equitable jurisdiction, the
Company Law Board should stay the arbitration proceeding. Even otherwise, he
submitted that by virtue of the provisions of Section 402(g) of the Act, the Company Law
Board could pass any order on just and equitable grounds. Further, in the instant case,
since the respondent initiated the arbitration proceedings only after filing of this petition,
it cannot be allowed to proceed with the arbitration proceedings. He referred to V/O.

Tractoroexport, Moscow v. Tarapore and Co., AIR 1971 SC 1, wherein, in an application

for stay of a suit under Section 3 of the Foreign Awards (Recognition and Enforcement)
Act, applying the principles of Section 35 of the Arbitration Act, 1940, the court had
restrained the party from proceedings with arbitration in Moscow during the pendency of
the legal proceedings. Accordingly, he submitted that there is no bar, even statutorily, in
the Company Law Board restraining the respondent from further proceeding with the
arbitration by the ICC. He further submitted that while under Section 8 of the Arbitration
Act, parallel arbitration proceedings in domestic arbitration are envisaged, in the absence
of any such a provision in Section 45 of the said Act, it should be perceived that foreign
arbitration proceedings cannot simultaneously continue. Therefore, both in law as well as
in equity, the arbitration proceedings can be stayed or the respondent restrained.

36. Shri Sarkar supplementing the arguments of Shri Chagla on this issue, again referred
to WO. Tractoroexport's case, AIR 1971 SC 1 and stated- that notwithstanding the
coming into force of the Arbitration Act of 1996 the principles of Section 35 of the old
Act, could still be applied according to which once legal proceedings are initiated and the
same are not stayed, then, the arbitrator cannot proceed with the arbitration and if it is still
continued, then, such proceeding would be invalid. According to him, in the absence of
the provisions of concurrent continuation of foreign arbitration under Section 45 of the
Arbitration Act unlike such provisions found in Section 8(3) of the Arbitration Act in
relation to domestic arbitration, the principles of Section 35 of the old Act, should be
applied in the case of foreign arbitration. He also drew support from Section 5 of the
Arbitration Act to state that, by virtue of that section, no judicial authority will intervene
only in domestic arbitration and as such it should be construed that foreign arbitration is
subject to intervention by a judicial authority which would also include power to stay the
arbitration proceedings.

37. Shri Anil Diwan submitted that the power of granting interim reliefs in a Section
397/398proceeding by the Company Law Board is governed by the provisions of Section
403, according to which such powers are to be exercised only in relation to the conduct of
the affairs of the company and as such cannot extend to stay the proceedings before the
ICC or to restrain the respondent from prosecuting those proceedings. Therefore, he
submitted that statutorily the Company Law Board has no powers for granting any relief
in matters other than in the conduct of the affairs of the company. He submitted that what
is not statutorily conferred cannot be exercised under inherent powers. Regarding the
power of the Company Law Board to restrain the respondent from proceeding with the
arbitration, he referred to Section 41(b) of the Specific Relief Act, and pointed out that a
court can restrain a person from prosecuting proceedings only in a court subordinate to
that court. In this connection, he referred to Cotton Corporation of India Ltd. v. United
Industrial Bank Ltd. [1983] 4 SCC 625 ; [1984] 55 Comp Cas 423, wherein the court has
observed that the "court has no jurisdiction either under Section 41(b) of the Specific
Relief Act or under its inherent powers under Section 151 of the Civil Procedure Code to
grant temporary injunction restraining a person from instituting any proceeding which
such a person is otherwise entitled to institute in a court not subordinate to that from
which the injunction is sought". If that be the case, the Company Law Board has to
examine, before exercising its inherent powers, whether the ICC is subordinate to the
Company Law Board before considering the prayer for restraining the respondent from
prosecuting his case before the ICC. Obviously, the answer would be in the negative.
Countering the arguments of Shri Sarkar that the principles of Section 35 of the old Act
should be applied, Shri Diwan pointed out to the observation of the Supreme Court
in Sundaram Finance Ltd. v. NEPC Ltd. [1999] 3 Comp LJ 205 wherein the court has
observed (page 210) : "The 1996 Act is very "different from the Arbitration Act, 1940.
The provisions of this Act have, therefore, to be interpreted and construed independently
and in fact, reference to the 1940 Act may actually lead to misconstruction. In other
words, the provisions of the 1996 Act have to be interpreted being uninfluenced by the
principles underlying the .1940 Act. In order to get help in construing these provisions, it
is more relevant to refer to the Uncitral Model Law rather than the 1940 Act".
Accordingly, he submitted that provisions of the old Act cannot be applied. Referring to
Renusagar Power Co. Ltd. v. General Electric Co. [1984] 4 SCC 679 ; AIR 1985 1156 at
para. 51, Shri Diwan submitted that the Supreme Court, in interpreting Section 3 of the
Foreign Awards Act as amended by Act 47 of 1973 has held that it is the obligation of the
court to stay the legal proceedings commenced by a party to a foreign arbitration
agreement. In other words, he submitted that it is the arbitration proceedings which gets
precedence over the legal proceedings. He further pointed out that Section 45 of the
Arbitration Act has gone one step further to mandate a judicial authority to refer the
dispute to arbitration. Referring to Section 16 of the Arbitration Act and also Articles 4
and 6 of the ICC Rules of Arbitration, he submitted that it is for the arbitral tribunal to
decide as to the existence, validity and the scope of the arbitration agreement. Once it is
prima facie established before the judicial authority that the matters under dispute before
it are covered by an arbitration agreement, it has no option but to refer the same to
arbitration and, therefore, the question of staying the arbitration proceedings already
commenced does not arise. He also referred to an unreported judgment of the Supreme
Court in Dresser Rand SA v. Bindal Agro Chemicals Ltd. (Civil Appeals Nos. 1455-1456
of 1994) wherein while considering the orders of the High Court staying further
proceedings before the ICC, the Supreme Court observed : "We are afraid this kind of
relief may not be permissible at all in domestic courts in respect of an international
arbitration regulated by the provisions of the Foreign Awards (Recognition
and Enforcement) Act, 1961. The High Court, we regret to say, was in serious error in
entertaining this plea and what is more granting it ex parte. Though we are informed that,
that order has since been modified, it is necessary to set aside that order". This according
to Shri Diwan, settles the issue as to the power of a court to stay the proceedings before
the ICC.

38. On this issue, the main concern of Shri Chagla is that there is likely to be conflict of
decisions--one by the arbitrator and another by the Company Law Board. Accordingly, he
prayed that either the ICC proceedings should be stayed or the respondent should be
restrained from taking further steps in the ICC proceedings. We do not propose to
deliberate in extenso the issue relating to staying the proceedings before the ICC in view
of the decision of the Supreme Court in Dresser Rand SA's case (Civil Appeals Nos.
1455-1456 of 1994). This case directly was on arbitration by the ICC and counsel for the
petitioner has not cited any later authority contrary to the decision of the Supreme Court
in that case. Further, even in V/O. Tractoroexport's case, AIR 1971 SC 1 the Supreme
Court, after observing that (page 11) "In England, courts have been very cautious and
have largely refrained from granting stay of proceedings in foreign courts ; the injunction
is, however, issued against a party and not a foreign court", injuncted the Russian firm
from proceeding with the foreign arbitration, applying the principles of Section 35 of the
1940 Act. Thus, the question of staying the proceedings before the ICC does not arise. In
regard to restraining the respondent from proceeding with arbitration before the ICC, in
WO. Tractoroexport's case, AIR 1971 SC 1 case, the Supreme Court applied the
principles of Section 35 of the 1940 Act as applicable to domestic arbitration to a foreign
arbitration. Section 35 of the old Act specified that once civil proceedings commenced,
then, proceedings before the arbitrator would be invalid. Shri Diwan has pointed out the
decision of the Supreme Court in Sundaram Finance Ltd.'s case [1999] 3 Comp LJ 205
wherein the Supreme Court has held that the provisions of the 1996 Act should be
interpreted without being influenced by the provisions of the 1940 Act. If so and if the
principles of domestic arbitration could be applied to foreign arbitration also as submitted
by Shri Sarkar, then, we have to only apply the provisions of Section 8(3) according to
which an arbitration can be commenced or continued and arbitral award made
notwithstanding the pendency of the application under Section 8(1). Thus, this Section
envisages even making an arbitral award during the pendency of the application
under Section 8(1). Assuming for argument's sake, that, during the pendency of the
application before the judicial authority, the arbitral award is made and later the judicial
authority rejects the application and proceeds with the legal proceedings, then in that
case, it appears that there could be conflicting decisions. However, a reference to the
provisions of Sections 34 and 35 in respect of domestic arbitration and Sections
46 and 48 in respect of foreign arbitration, would indicate that, there is hardly any
possibility for conflicting decisions. Further, we note that the powers under Section
402(g) of the Act, are to be exercised only in the final order to be passed and not at the
interim stage. Any way, we feel that the discussion on the power of the Company Law
Board in staying/restraining, is only of an academic interest in the present case, as we
have dismissed the application of the first fespondent only on the ground that there is no
commonality of the parties, and if so, for the same single reason, the application of the
petitioner has also to be dismissed, which we do.

39. In fine, both the applications C. A. No. 248 of 1999 and C. A. No. 254 of 1999 stand
dismissed. The respondents will file their replies to the application C. A. No. 237 of 1999
by January 20, 2000, and rejoinder, if any will be filed by February 5, 2000, and the
application will be heard on February 15, 2000 at 2.30 p.m.

40. Before parting with this order, we would also like to mention that, after the conclusion
of the hearing, both the sides expressed their desire to provide us with written
submissions and accordingly they did so. Since we found some additional
arguments/citations in these submissions, we have neither considered them in this order
nor taken them on record for the reason that the other side did not have the benefit to react
on the written submissions.

41. After the conclusion of the hearing, we advised both the sides to explore the
possibility of resolving the disputes amicably and intimate the results of the same by
December 15, 1999. Since no feedback has come from the parties by December 15, 1999,
we are releasing this order.
 CONCLUSION
There are many advantages for the law treats a company as being a separate person
from its member and those who manage its operations. Firstly, a company’s
obligations and liabilities are its own, and not those of its participants. Secondly, a
company can sue and be sued in its own name. Finally, a company has perpetual
succession a company’s property is not the property of its participants. Although the
principles of separate legal personality and limited liability sometimes result in
circumstances that may seem favorable to the Company’s shareholders and
detrimental to its creditors, separate legal personality and limited liability is not the
same thing. Limited liability is the logic consequence of the existence of a separate
personality. The legal existence of a company means it can be responsible for its own
debts. The shareholders will lose their initial investment in the company but they will
not be responsible for the debts of the company. Just as human can have restriction
imposed on their legal personality. A company may still be formed today without
limited liability as a registered unlimited company.