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1983 Supreme(Del) 188
High Court Of Delhi
GLOBE MOTORS LIMITED - Appellant
Versus
MEHTA TEJA SINGH AND COMPANY - Respondent
Decided On : 07/05/1983
Directors of a company have a fiduciary duty to act in the best interests of the company and to avoid conflicts of interest. Any agreement entered into by a company with a firm in which a director is a partner can be avoided by the company if it is shown that the agreement was not in the best interests of the company and that the director breached his fiduciary duty.
Headnote:
ARBITRATION - APPOINTMENT OF ARBITRATOR - AGREEMENT - VALIDITY - FIDUCIARY DUTY OF DIRECTORS - BREACH - AVOIDANCE OF CONTRACT - RECOVERY OF PROFITS.
Fact of the Case:
The appellant, the Official Liquidator of Globe Motors Ltd., challenged the order of the learned single Judge allowing the application under Section 20 of the Arbitration Act filed by the respondents, who claimed to be distributors for the sale and marketing of the company's steel products.
Finding of the Court:
The court held that the agreement between the company and the respondents was vitiated and void due to the breach of fiduciary duty by the directors who approved the agreement. The court found that the terms of the agreement were unfair and one-sided, heavily favoring the respondents and providing them with a minimum fee of Rs. 1 lakh 20 thousand per annum irrespective of sales, without any corresponding obligation to perform any services or incur any expenses.
Issues: 1. Whether the application for arbitration was barred by limitation? 2. Whether the agreement dated 1-6-1967 was valid? 3. Whether the agreement was vitiated on the grounds of fraud and being against the interest of the company?
Ratio Decidendi: 1. The court held that the application for arbitration was not barred by limitation as the right to apply accrued from October 1970 onwards, which was within time. 2. The court held that the agreement was not invalid as the Board of Directors had approved it, and there was no requirement of law to place this agreement before the general body of the company. 3. The court held that the agreement was vitiated and void due to the breach of fiduciary duty by the directors who approved the agreement. The court found that the terms of the agreement were unfair and one-sided, heavily favoring the respondents and providing them with a minimum fee of Rs. 1 lakh 20 thousand per annum irrespective of sales, without any corresponding obligation to perform any services or incur any expenses.
Final Decision: The court allowed the appeal, set aside the judgment of the learned single Judge, and dismissed the application of the respondents filed under Section 20 of the Arbitration Act. The court also clarified that the fee already paid to the arbitrator would not be sought to be refunded or claimed back.
( 1 ) THIS is an appeal filed against the order of the learned single Judge by which he allowed the application under Section SO of the Arbitration Act filed by the respondents.
( 2 ) THE respondent s case was that an agreement had been entered into with the appellant company which is now under liquidation by means of an agreement dated 1-6-1967011 the terms mentioned therein. In the said agreement it was also stated that any dispute or difference arising in regard to any of the terms contained in the agreement, shall be settled in accordance with the provisions of the Arbitration Act. The application under Section 20 of the Arbitration Act was filed in November, 197. 3.
( 3 ) IT may be noted that application for winding up of M/s Globe. Motors Ltd. was moved in March, 1968 Globe motors was having one of its industrial units manufacturing steel under the name of Globe Steels. The agreement purports to appoint the respondents as distributors for the gale and marketing l/6th of the company s steel products. Objection was taken by the Official Liquidator on various grounds. Broadly the grounds raised were- (i) whether the application filed under Section 20 of the Arbitration Act was barred by limitation; (ii) whether the agreement dated 1-6-1967 was valid and the next question related to whether the agreement was vitiated on the grounds of fraud and being against the interest of the company. The learned single Judge found all the pleas against the appellant and in favour of the respondents, and has, therefore, directed the matter to be referred to the arbitration. Hence the appeal by the Official Liquidator.
( 4 ) THE first contention raised by Mr. Andley the learned counsel for the appellant is that as the agreement was entered into on 1-6-1967 the application filed under Section 20 in November, 1973 is barred by time. It is common case that article 137 of the Schedule to Limitation Act 1963) which provides for a period of 3 years is applicable to application hied under Section 20 of the Arbitration Act. Mr. Andley urges that the right to apply accrued when the first default took place in payment of the monthly payment of Rs. 10,000. 00 in terms of Article IV (b) of the agreement and as admittedly company made no payment, limitation would start from August, 1967, and application had become barred by 1970. The learned single Judge however, has held that the firms claim was repudiated only on 29-4-1971 therefore, the period of three years is to be calculated from that date, and if that is done the application filed in November 1973 was within time, We deem it unnecessary to examine whether the right to apply accruned from the date of repudiation, namely, 29-4-1971 because even accepting the argument of Mr. Andley that the period was to be calculated and the right to apply accrued when the company defaulted in making payment of Rs. 10,000. 00 monthly, it is evident that limitation would start from each default when it was committed. Thus for defaults committed for non-payment of monthly payments from October, 1970, would have to betreated within time as application was moved in November, 1973. The application for arbitration on the ground of limitation, therefore, could not be thrown out for right to apply accrued for part of the claim only from October, 1970 onwards, which was within time. Of course it may have been open to the appellant to urge before the arbitrator that the claim of the respondents for a period prior to October, 1970 was barred by time. We decide nothing on this point because once it was held that the matter had to be referred to arbitration the other question, namely-whether any particular part of the claim is time barred or not, would evidently be a matter for the arbitrator to decide. We, therefore, agree with the learned single Judge that the application was not time barred.
( 5 ) THE next contention of the appellant was that the agreement had not been put to the general body of the shar
