P L D 1971 Supreme Court 564 (PLP)

181. The cost of arbitration and incidental to any such refe rence and award shall be as per the rates of the International Chamber of Commerce for such cases and the parties will have to abide by these rules.

182. The submission to arbitration shall be subject as to the mode and consequence of the reference and in all other respects, to the Rules of Conciliation and Arbitration of the International Chamber of Commerce." After this objection the said respondent went on to plead on merits against the injunction order. No application was, however, made under section 34 of the Arbitration Act for the stay of the suit. Nevertheless, the trial Court on the 17th December 1968, stayed the suit as against the respondent Kayser- Sartaj Company Ltd. only under section 34 of the Arbitration Act and vacated the temporary injunction issued earlier so far as the said respondent was concerned on the ground that the Articles above referred to provided for reference to arbitration of disputes arising between the Company on the one hand and any of its shareholders on the other hand. This clause, according to the trial Court, bound the appellant-Company, which was a shareholder of the said Kayser-Sartaj Company Ltd., a private limited Company. It is from this order that the appellant-Company came up to the High Court in appeal. The appeal was pressed before the High Court on a number of grounds, namely :- (i) That there was no valid submission to arbitration at all, (ii) that the application for stay of proceedings was barred by reason of the fact that the applicant had already taken a step in the proceeding by filing a written statement, (iii) that the arbitration clause was hit by the provisions of section 152 of the Companies Act, and (iv) that the dispute between the parties, in any event, did not fall within the purview of Articles 180, 181 and 182 of the Articles of Association of Kayser-Sartaj Company Ltd. The learned Judges in the High Court repelled all the contentions and came to the conclusion that the dispute came within the ambit of Article 182 of the Articles of Associa tion read with clause JII(2) of the Memorandum of Kayser Sartaj Company Ltd., that there was a valid submission to arbitration, section 152 of the Companies Act did not debar such a submission to arbitration by a company, that an arbitration by a foreign arbitrator in a foreign country was not outside the scope of the Arbitration Act and that the appli cation for stay under section 34 of the latter Act was maintainable as the respondent had not taken any step in the proceedings by filing a written objection to the injunction application. It is unnecessary for us to deal with all the above points which have been elaborately dealt with by the High Court for, this appeal must, in our view, succeed on the first ground, namely, that the present dispute does not fall within the purview of the alleged arbitration agreement set up by the A respondents in this case. The learned Judges of the High Court have, in our view, fallen into serious error and totally mis conceived the scope of the Memorandum and Articles of Association of a Company vis-a-vis its shareholders. It is no doubt true that under the provisions of subsection (1) of section 21 of the Companies Act, 1913, "the Memorandum and Articles shall, when registered, bind the Company and the members thereof to the same extent as if they respectively had been signed by each member and contained a covenant on the part of each member, his heirs, and 1: gal representatives, to observe all the provisions of the Memorandum and of the Article subject to the provisions of this Act" and, therefore, a provision therein to refer the disputes arising between the Company and its shareholders to arbitration, as in the present case, is also a binding covenant. It does not, however, follow from this that all disputes arising between a member or shareholder of a company and the company itself, no matter what its nature, must also come within the ambit of this section merely because, the dispute is with regard to a matter which is within the objects of the Company as detailed in its Memorandum. The Memorandum only catalogues the objects for which a Company is formed and it is not unusual for a Memorandum of a Company to incorporate within it almost all conceivable objects in order that the vires of its action in launching upon a particular business or enterprise cannot be challenged by any shareholder. But we must not confuse this with the Articles of Association of a Company which deal with the powers of the Company. A Memorandum is a covenant between the Company and its members that the Company shall not engage in any business which is not mentioned in the Memorandum but with regard to the other matters it is the Articles of Association which determine the rights and liabi lities of the contracting parties, namely, the Company and its members as such. But even so the Articles of Association constitute a contract between the Company and its members only in respect of the rights possessed as a member but not in respect of rights which he possesses apart from his mem bership. The contractual force of the Articles is limited to such provisions thereof as apply to the relationship of the members as such vis-a-vis the company. They do not give either the company or any individual member of the company any special contractual right beyond those which arise in respect of their ordinary rights as members. The covenants contained in the Memorandum and Articles of Association of a Company only bind the members as pointed out by Palmer in his Company Law (Twentieth Edition, p. 115) "to observe such of the provisions of the Articles as concerned their rights, privileges. powers and obligations as members.". Rights which a member may have against a company not as a member but in a different capacity, are, therefore, not the subject-matter of the contract contained in the Articles of Association. It appears that in England where similar provisions were to be found in section 20 of the old English Companies Act, there was considerable conflict of judicial opinion as to the precise contractual efficacy of the Memorandum and Articles of Association of a company. Some decisions held that the Articles did not form a contract between a member and the company, some held that the Articles were not a contract with the company but a contract with the other members and yet others held that the Articles were a contract only as between the members inter se in respect of their rights as shareholders. All these decisions came up for review in the case of Hickman v. Kent or Romer Marsh Sheep-Breaders Association ((1915) 1 Ch. 881), where Astbury, J., after reviewing all thesedecisions came to the conclusion that a company is entitled as against its members to enforce and also to restrain breaches of the regulations by the company. But he was of the view that "this much is clear, first, that no article can constitute a contract between a company and a third person; secondly, that no right merely purporting to be given by an Article to a person, whether a member or not, in a capacity other than that of a member, as, for instance, as, solicitor, promoter, director, can be enforced against the company and, thirdly, that Arti cles regulating the rights and obligations of the members generally as such do create rights and obligations between them and the company respectively". That was a case in which a member of the association had sued it claiming a declaration that he was entitled to have the resolutions and proceedings of the Association and of any committee thereof truly and accurately entered in the minutes and for various kinds of injunctions for restraining the Association from doing any act in derogation of his rights as a member. The Court stayed the proceedings in that suit under section 4 of the English Arbitration Act, 1889, on the basis of the provisions of Article 49 of the Associa tions, Articles and, alternatively, under the submission to arbitration clause contained in the plaintiff's own application for membership which had been duly accepted by the Associ ation. The conclusions of Astbury, J., with regard to the nature of the contract contained in the Articles of Association of a Company were subsequently approved by the Court of Appeal -in England in the case of Beattie v. M. & P. Beattie Ltd. ((1938) 3 All E R, 214)wherein ft was pointed out that the contractual force given to the Articles of Association was limited to those provisions of the Articles that applied only to the relationship of their members in their capacity as members and did not extend to those provisions that applied to the relationship of the members and the directors as such. In that case too, an application had been made under sec tion 4 of the English Arbitration Act to stay certain proceedings instituted by a shareholder against a private limited company and one of its directors for challenging the validity of certain payments made to that director by way of remuneration. The stay was refused on the ground that what was being litigated upon was a dispute between the company and the said director in his capacity as a director. This was not seeking to enforce a right which the shareholder enjoyed in common with all other members and, therefore, the dispute did not come within the ambit of the Arbitration clause contained in the Articles of Association of the company. To the same effect is the decision of the British Court of appeal in the case of London Sack & Bag Co. Ltd. v. Dixon & Lugton Ltd. ((1943) 2 All ER 763). In this case Dixon & Lugton Ltd. brought a suit for damage against London Sack & Bag Co. Ltd. on the ground that certain jute goods supplied by the latter were not according to the description contained in the contract made between them. There was no arbitration clause in that contract but, nonetheless, London Sack & Bag Co. Ltd., applied under section 4 of the English Arbitration Act for the stay of the action on the ground that both the disputing parties were members of the United Kingdom Jute Goods Association Ltd., and that company bad rules under which all disputes arising out of transactions connected with the trade had to be referred to arbitration. Section 20 of the English Companies Act of 1929 was relied upon for contend ing that the rules of the Association constituted a binding agreement between the members of the Association inter se for the submission of their disputes to arbitration. This contention was repelled on the ground that the Articles of Association of a Company do not relate to rights of action created entirely outside the company relationship, such as, trading transactions between members. They do not constitute a contract between the members inter se for all purposes but are only a contract between the company and its members and the members inter se in respect of the rights and liabilities of members as members, which can, under the Articles be enforced by or against the members only through the company. It would, thus, seem to appear that according to the general consensus of judicial opinion in England the Articles of Association of a company deal only with the rights arising or connected with the relationship of the members of the company and the company as such and do not relate to the rights or liabilities which may have arisen as a result of independent or separate transactions such as trade relationships between the) members of a company inter se or a member and the company. We see no reason to take a different view for the provisions of section 21 of our Companies Act is identical in terms with the provisions of section 20 of the English Companies Act, 1929. Applying this principle, therefore, to the present case we are of the opinion that the dispute which arose between M/s. G. N. Pfaff A. G. and K