Guest Post: Arbitrating Oppression and Mismanagement

(In the following post, Mr Gursharan Virk, Advocate, Singhi & Co, considers the law on the arbitrability of claims involving oppression and mismanagement)

Can
an arbitration clause alienate the erstwhile inalienable statutory right of a
shareholder under sections 397-399 of the Companies Act, 1956 (the ‘Act’)?

The
fundamental issue here is whether rights ‘in
rem
’, available under sections 397-399 of the Act, are capable of being
decided by arbitrators? This question arises because
remedies which the
arbitrator can award are limited by considerations of public policy and by the
fact that he is appointed by the parties and not by the State. For example, he
cannot impose a fine or a term of imprisonment, commit a person for contempt or
issue a writ of subpoena; nor can he make an award which is binding on third
parties or affects the public at large. This proposition has been discussed in
Fulham.

The
language of section 397 of the Act is crystal clear. It reads “…(2) If…the Company Law Board is of the
opinion – …(b) that to wind up the company would unfairly prejudice the member
or members, but that otherwise the facts would justify the making of a winding
up order…
”. Thus, a petition under section 397 of the Act presupposes the
making of a winding up order of the company as justifiable. So, if one were to argue
that issues under ss.397-399 be relegated to arbitration (presuming that a
valid arbitration clause exists), one would have to first establish that an
arbitrator can wind-up a company. The Apex Court, in
Haryana
Telecom v. Sterlite
.,
has unequivocally stated that only such disputes which an arbitrator is
competent or empowered to decide can be referred to arbitration. The Court
further observed that an arbitrator, notwithstanding any agreement between the
parties, would have no jurisdiction to order winding up of a company since such
power is conferred on a court by the Act.

I
am somewhat skeptical about the alternative proposition enunciated by some
cases which states that the arbitral tribunal need only be satisfied that
grounds for winding-up the company in question exist. The reason for my
skepticism is because an arbitral tribunal is traditionally, statutorily and
jurisprudentially incapable of making an award to wind-up a company. This is because
doing so will lock the tribunal’s horns with ‘Indian public policy’, and
rightly so. So, can we let privately appointed ad hoc arbitral tribunal decide whether companies, public or
private, are capable of being wound up? Who is to consider the lis of a shareholder/creditor/objector
in such an arbitration when they are never parties to the arbitration clause
under which the tribunal comes to a conclusion that winding-up the company
would be appropriate. Thus, this alternative proposition, in my humble opinion,
fails at the outset.

Nonetheless,
some Indian Courts and Tribunals have gone ahead and relegated issues, which
were earlier under exclusive jurisdiction of the Company Law Board, to
arbitration.

This
brings us the issue of commonality of parties. What must be decided is whether
parties to a petition under ss.397-399 and the arbitration agreement are common.
More often than not, the answer is in the negative. Complicated questions of
the company in question being signatory to the shareholders’ agreement executed
between shareholders, terms of the shareholders’ agreement incorporated in the
articles of association of the company, etc. have arisen in various cases. The
issue of commonality of parties in relation to civil suit has already been
settled by the Apex Court in the landmark decision in
Sukanya.
The Apex Court observed that where a suit involved parties, some of who were
parties to an arbitration agreement and some were not, section 8 of the
Arbitration and Conciliation Act, 1996 would not be attracted. With reference
to ss.397-399, the issue now stands settled by the decision in
Rajendra Kumar Tekriwal,
and the decision of the Delhi High Court in the case of Ajay Kirti Kumar Dalmia v. Company Law Board & Ors., [(2009)
148 Company Cases 742 (Delhi)]. Now, at this juncture, it is pertinent to
mention that the Apex Court, in deciding whether the proposition laid down in Sukanya Holdings (supra) was correct, in
Chloro Controls,
while upholding (and somewhat, distinguishing) Sukanya Holdings, observed that in Sukanya, the question of commonality of causes of action and
parties was decided in light of section 8 of the Arbitration and Conciliation
Act, 1996. Furthermore,
a suit had been filed for
dissolution of partnership firm and accounts also challenging the conveyance
deed executed by the partnership firm in favour of one of the parties to the
suit. The Apex Court, noticing the facts of the case, emphasized that where the
subject matter of the suit includes subject matter for arbitration agreement as
well as other disputes, the Court did not refer the matter to arbitration in
terms of Section 8 of the Act. Thus, it would be appropriate to state that Sukanya can still be considered good law
when read with the comments made to further expropriate it in Chloro Controls (supra).

But, in the interest of neutrality, it would
be appropriate to mention that Courts have been quick in providing cautionary
judgments which state that where, parties which are neither necessary nor
proper to the adjudication of the dispute, are impleaded only with the intent
of avoiding arbitration, such petitions would be liable to be dismissed and the
matter therein could be relegated to arbitration. Relevant cases in point are
decisions of the Delhi High Court in Delhi
Express Travel Pvt. Ltd. v. International Air Transport Association & Ors.

(MANU/DE/0739/2009) and
W.P.I.L.
v. NTPC
. It goes without
saying that these decisions were made in light of facts raised in those cases
and a decision as to commonality of parties would, obviously, not be subject to
a straightjacket rule.

In
some cases, like in Dr. G. L. Purohit v.
Dr. S.S. Agarwal
, [(2011) 163 Company Cases 205 (CLB)], the peculiar issue
being dealt with was a company, which was not party to the arbitration
agreement, offering to ‘voluntarily’ relegate itself to arbitration. Rightly
so, the Hon’ble Company Law Board rejected this argument and reiterated that a
party-respondent, not signatory to arbitration agreement, could not offer to be
bound by arbitration and could not participate in arbitration proceedings.

The
next test that may be applied to decide the arbitrability of issues traditionally
raised under ss. 397-399 is whether the said issues are capable of being
decided without reference to the terms of the agreement encompassed by an
arbitration clause. It can be safely said that if the matter relates to
oppression/mismanagement directly relating to the rights of or benefits to the
shareholders in their capacity as members of the company arising out of the
provisions of the Act, the articles of association of the company or on
equitable grounds, the issues are not required to be referred to arbitration.
This proposition has been enunciated by the Principal Bench of the Hon’ble
Company Law Board in
Enercon,
Altek Lammertz Needle Ltd.,
but most clearly and dare I say, beautifully, in the case of Rajendra Kumar Tekriwal (supra).

We
must not forget that, by its very nature, a petition under ss. 397-399 of the
Act is a proceeding in rem. It is essentially a derivative action by the
shareholder for the benefit of the Company. This proposition has been discussed
and affirmed by the Apex Court in the case of
Booz
Allen
.

The
very concept of alternative dispute resolution does not, unless expressly
specified, render jurisdictional exclusivity to a tribunal. Though this
proposition still lies in a grey area, one thing is certain; that an
arbitration clause would not render otiose, statutory remedies which would
commonly have been made available to a shareholder of a company. In cases where
the language of the arbitration agreement is such that it does not amount to
waiver of other rights and remedies available under statute, there would definitely
not be an obligation of a judicial authority to refer matters to arbitration.
Would this stand, in effect, destroy the very essence of speedy and private
justice that arbitration seeks to provide? This question still remains
unanswered.

As
was held in the case of
Sporting
Pastime
.,
the scope of the Company Law Board to grant reliefs under section 402 of the
Act is much wider as compared to the reliefs which can be granted by an
arbitrator. This is another argument oft-rendered by Courts and Tribunals while
granting statutory superiority to the Company Law Board over arbitral tribunals.

Under
the new law, i.e. Companies Act, 2013, sections 397, 398, 401, 402, 403 and 404
of the existing law, i.e. Companies Act, 1956 have been clubbed into sections
241 and 242. The propositions under new sections are fairly similar and
somewhat para materia the existing
sections and thus, it appears, that the new law will not silence the
controversy at hand.

To
conclude, the Chancery Division has, in a fine judgment, in the case of
Exeter City AFC,
reasoned that “…if the right to petition
to wind up conferred on every single shareholder is a condition of
incorporation under the Companies Act, then so in my judgment is the right to
petition for relief against unfair prejudice…the statutory rights conferred on
shareholders to apply for relief at any stage are, in my judgment, inalienable
and cannot be diminished or removed by contract or otherwise.
” Though this
decision now stands oveeruled by Fulham
(supra), in my view, it leaves an important imprint in the development of an
area of Company Law which will definitely see some hustle-bustle in times to
come. Giving due respect to the decision in Fulham,
one cannot overlook the fact that that decision overruled Exeter based on a proposition of factual vagaries. The broader
proposition laid down in Exeter still
holds true, in my opinion, specially for an adolescent jurisdiction like India,
because the rights of shareholders (who, in the Indian scenario, are not always
well informed, literate, capable of exercising their rights independently,
etc.), would be unfairly prejudiced if private adjudications by and before
party appointed arbitral tribunals were to be permitted to decide their fate.

It
remains to be conclusively decided as to who will gain territorial foreground in
the battle to adjudicate oppression/mismanagement cases, the arbitral tribunal
or the Company Law Board.

About the author

V. Niranjan

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