Arbitrability of Oppression and Mismanagement Petitions in India: Dilemma of Courts

Overview of the Post :

"Various rulings of Indian Courts have led to development of the jurisprudence regarding the arbitrability of NCLT disputes in India. Firstly one needs to analyse the origin and context of the issue of arbitrability of NCLT disputes prior and post the entry into force of the Arbitration Act 1996. Secondly ,discussion on the jurisprudence of Indian Courts in this area, again, pre- and post-Arbitration Act 1996 ."

Introduction
The impasse over the arbitrability of National Company Law Tribunal (NCLT) disputes has been the debating point in domestic as well as international arbitrations. The Companies Act 1956 contains several provisions to protect the interest of minority shareholders of a company against unfair corporate management, most notable among them being the power conferred upon the shareholders to file a petition for oppression and mismanagement.

Law and the current situation.

Under Section 241 and 242  of the Companies Act 2013, the NCLT possesses statutory  jurisdiction to provide relief in cases of oppression and mismanagement, where it is shown that either the conduct of the majority shareholders is oppressive, or the affairs of the company are conducted in a manner prejudicial to the public interest.[1] The nature of this relief is unique, in the sense that within the Indian judicial system  it can only be granted by the NCLT. However, the arbitrability of disputes on oppression and mismanagement remains not expressly prohibited by the 2013 Act and parties often turn the uncertainty of law to their favour, by referring such disputes to arbitration. Indian Courts have often elaborated and discussed the scope and nature of arbitrability of such cases, often reaching conflicting conclusions, prejudicing the statutory law.

With the  rise of shareholder activism in India and the simultaneous growth of arbitration as a preferred method of dispute settlement, the Indian judiciary is increasingly facing a dilemma about the extent to which arbitration can be used as a means to redress shareholders' grievances. Interestingly, while in some of these cases, the High Court referred the matter to arbitration pursuant to an arbitration clause in the shareholders' agreement/ articles of association of the company, in several other cases, the High Court declared that the shareholders' oppression suit is per se non-arbitrable.

Arbitrability of NCLT Disputes in cases of oppression and mismanagement.

“Arbitrability” is not defined under the Arbitration and Conciliation Act 1996 of   India. But Supreme Court in the landmark case of Booz Allen Hamilton v. SBI   Home Finance Ltd. and Ors[2] defined “arbitrable” disputes as ones :

§  arising from the arbitration agreement;

§  that parties have referred to arbitration; and

§  capable of being adjudicated through arbitration.

While adjudication of disputes with respect to points (i) and (ii) has been consistently scrutinized by Indian Courts, the question of which disputes are capable of being referred to arbitration has largely been the jurisprudence of the courts pre and post the Arbitration Act of 1996.

The 1996 Act states that an arbitral award rendered on in not arbitrable disputes can be set aside by Courts.[3] Disputes generally considered not arbitrable are disputes relating to rights in rem (rights associated with property) ,but rights in personam (rights based on relationships) are amenable to private arbitration. For Example,  insolvency and winding-up proceedings, probate matters, and divorce, among others, are usually considered inarbitrable. Whereas the case of a breach of contract resulting from insolvency is arbitrable.

Prima facie, oppression claims appear to be a right in personam since they can only be filed by aggrieved members against oppressing members. By virtue of the Booz Allen case[4] discussed below, these claims should be considered arbitrable. However, such claims arise from activities conducted in a manner prejudicial to the public interest, and it is a settled position of law that rights vested in the public interest cannot be waived by contractual provisions.[5] From this second standpoint, claims of oppression and mismanagement should be considered inarbitrable. Thus, one may reach different conclusions depending on the line of argument followed.

Jurisprudence of the Courts - pre and post Arbitration Act of 1996.

                                  Pre-1996 Position :

·        Prior to the Arbitration Act of 1996, the NCLT had exclusive jurisdiction in dealing with oppression and mismanagement claims. Under section 34 of the Arbitration Act 1940, Courts followed a consistent approach , that disputes concerning section 402 of the 1956 Act (now section 241 of the 2013 Act) could not be referred to arbitration.

·   In Surendra Kumar Dhawan v. R. Vir [6], the Delhi High Court held that such disputes are within the purview of ‘statutory jurisdiction’, which cannot be ousted by an arbitration clause, by virtue of section 9 of the 1956 Act .

·      Similarly, in O.P. Gupta v. Sfflv General Finance (P) Ltd. and Ors.[7] the Delhi High Court reiterated the same position, holding that ‘…[the] Companies Act, 1956 has given exclusive jurisdiction and indeed the duty to the Court to protect the interests of shareholders and creditors etc. of Companies.’ The Court further held that ‘it would be entirely useless to direct that this matter shall be referred to some arbitrator to be appointed by the parties. Such an arbitrator would have no powers and could not pass any order either under Section 402 or 403. The appointment of such an arbitrator would be a complete waste of time as he would be unable to pass any orders at all in the case’.

·      Bombay High Court in 1985 in the case of Manavendra Chitnis and Anr. v. Leela Chitnis Studios P. Ltd. and Ors.,[8] held that ‘a petition under Sections 397 and 398 cannot be the subject-matter of an arbitration, for an arbitrator can have no powers such as are conferred on the court, such as Section 402 of the Companies Act’.

·   In the cases above, the arbitration agreement formed part of the Articles of Association instead of a separate agreement. Hence, it can be contended that the power to override the memorandum and articles under section 9 of the Companies Act 1956 played a crucial part in the inclination of the Court to arrive at such a conclusion.

                                 Post-1996 Position :

·      With the introduction of the 1996 Arbitration Act, the discretion earlier vested with the Courts to refer the disputes under Part I of the Act to arbitration was taken away by an amendment to section 8 of the 1956 Companies Act. The Act now provides mandatory reference to arbitration in circumstances where the arbitration agreement exists between the parties, and one of the parties has made a reference to arbitration, subject to the agreement being valid and operative.[9]

·        In the landmark Supreme Court case of Haryana Telecom v Sterlite Industries[10] , Division Bench in response to an application under section 8 of the 1996 Act, held that section 8 only contemplates referral of such disputes which the arbitrator is competent to decide. Therefore, the Court dismissed the request for a winding-up petition to arbitration by virtue of the fact that only the Companies Act possessed the necessary power to adjudicate such disputes.

·   While Haryana Telecom conclusively determined the arbitrability of winding-up petitions, it also led to widespread confusion in respect of the reference of oppression claims to arbitration. In subsequent cases on this issue, the Courts took the view that principles applicable to winding-up petitions could not be extended to oppression and mismanagement claims. The only threshold to be considered is the fulfilment of requirements as contemplated under section 8 of the Arbitration Act, namely, the existence of a valid arbitration agreement, the commonality of the parties and the subject matter, and the filing of the application before the submission of the first statement on the dispute.

·   This shift in position post-Arbitration Act 1996 made it obligatory for judicial authorities to refer the dispute to arbitration. This was later observed by the Courts consistently in Escorts Finance,[11] Naveen Kedia,[12] Khandwala Securities Ltd[13] and other cases. 

·       The position of law was summarised in Bhadresh Kantilal Shah[14] as follows:-

     While considering a petition under sections 397/398 (now section 241 and 242 of the 2013 Companies Act), the Company Law Board (CLB) (now NCLT) is “seized of an action”; The right to file a petition concerning oppression claims arises out of the commercial relationship between the shareholders and the company; The principles applicable to winding-up proceedings do not necessarily apply to oppression claims; The provisions of the Arbitration Act 1996 are not repugnant to the provisions under section 9 of the Companies Act;  The CLB is bound to refer disputes to arbitration if the requirements of section 8 of the Arbitration Act are fulfilled.

·      In subsequent cases, the Company Law Board deviated from its position by laying down a test to refer such disputes to arbitration, instead of the blanket qualification previously advocated. As laid down in Gautam Kapur v. Limrose Engineering[15] and Sudarshan Chopra v. Company Law Board[16], the test considered whether the allegations of oppression/mismanagement contained therein could be adjudicated without reference to the terms of the arbitration agreement. If the answer to this is yes, then the question of reference to arbitration does not arise. The CLB also established that the statutory jurisdiction of parties cannot be ousted, even with the consent of the parties.

·     In 2007, Madras State’s High Court in Sporting Pastime India Ltd. v. Kasturi & Sons Ltd., [17]changed the position again, by re-invoking the blanket ban on the reference of disputes to arbitration. Aside from hailing the fact that the CLB is empowered to deal with oppression claims independently, it clarified that it cannot be said that the issues involved in the arbitration and the issues coming under sections 397 and 398 (now section 241) are two different issues, and the scope of the petition filed under sections 397 and 398 will, therefore, be quite distinct from the scope of the arbitration clause contained in the agreement.

·      Above reasoning was reiterated in Rakesh Malhotra v. Rajinder Malhotra[18], where the Court, once again, upheld the rule laid down in Haryana Telecom, stating that only those disputes in which the arbitrator is competent or empowered to decide can be referred to arbitration. However, the Court seems to have created a small window of exceptions, allowing the arbitrability of cases where the petition is found to be malafide or vexatious.

Conclusion

Indian Courts have considered claims concerning oppression and mismanagement as primarily inarbitrable, holding that the statutory jurisdiction of the NCLT cannot be ousted. It is true that Courts have digressed in their views at different points in time (such as in the Sporting Pastime and Rakesh Malhotra cases), but these contrasting decisions seem to have been dictated by the factual circumstances of the cases at issue.

Thus, although a complete overview of the jurisprudence on this issue seems to show that the position of the Courts on the issue of arbitrability of oppression and mismanagement claims remains inconclusive, early signs appear to have emerged in the case law leaning against the arbitrability of such disputes overall.

Aditya Jain is Advocate on Record at Supreme Court of India and Partner at J&G Advocates

Neha Gyamlani is an Advocate at Rajasthan High Court/Supreme Court and Partner at J&G Advocates

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[1] Shanti Prasad Jain v. Kalinga Tubes Ltd., (1965) 35 Comp Cases 351.

[2] (2011) 5 SCC 532

[3] Section 34(2)(b) and 48(2) of the Arbitration Act 1996.

[4] (2011) 5 SCC 532

[5] Abdul Waheedkhan Pathan v. Reny Charles Pavey and Anr., AIR 1965 Kant 303

[6] 1977 47 Company Cases 276.

[7] [1977] 47 Comp Cas 279 (Delhi).

[8] [1985] 58 Comp Cas 113 (Bom)

[9] Takshila Hospitals Ltd. v. Dr. Jagmohan Mathur, (2002) 50 CLA 51

[10] AIR 1999 SC 2354

[11] Escorts Finance Ltd. v. G.R. Solvents, (1999) 96 Comp Cas 323 CLB

[12] Naveen Kedia and Ors. v. Chennai Power Generation Ltd.(1999) 95 Comp Cas 640 (CLB-PB)

[13] Khandwala Securities Ltd. v. Kowa Spinning Ltd. [1999] 97 Comp Cas 632

[14] Bhadresh Kantilal Shah v. Magotteaux International, (2002) 111 Comp Cas 220 (CLB).

[15] 2005 128 Comp Cas 237 CLB

[16] 2004 (2) ARB. LR 241

[17] 2007(1) ARBLR99 (Madras).

[18] (2015) 2 Comp LJ 288 (Bom).