Are disputes in s. 397-398 petitions capable of being referred to arbitration?

A learned Single
Judge of the Bombay High Court recently considered (in Rakesh Malhotra v. Rajinder Malhotra) the question of whether
disputes before the CLB under ss. 397-398 and 402 of the Companies Act, 1956
are capable of being referred to arbitration. 

Patel J. concluded that having
regard to the nature and source of the powers of the CLB, disputes in petition properly
brought under ss. 397-398 are not capable of being referred to arbitration. His
Lordship clarified that mala fide,
vexatious, oppressive or “dressed up” petitions can be so referred. In other
words, in petitions under ss. 397-398 read with s. 402, “… it is not enough for an applicant seeking a reference to arbitration
merely to show that there exists an arbitration agreement. He must, in
addition, establish before the CLB that the petition is mala fide, vexatious,
and ‘dressed up’ and that the reliefs sought are such as can be resolved by a
private arbitral tribunal…

The Court noted
that there was a difference between what a civil court could do in a derivative
action or shareholder action, and what a specially empowered authority such as
the CLB can do. The powers in s. 402(a) to (g) were held to be of such expansive
nature that no arbitral tribunal could be called upon to exercise such powers. It
was argued before the Court that (a) the CLB always has the power to refer
parties to a civil suit, and (b) in a civil suit, disputes within the ambit of
an arbitration clause would necessarily have to be referred to arbitration,
therefore (c) actions before the CLB were also referable to arbitration. This
argument was not accepted; with the learned Single Judge characterizing the
argument as an example of the fallacy of the undistributed middle. The learned
Single Judge placed reliance on Sukanya,
Booz Allen, Haryana Telecom and Bennett

It was further
argued that in case the CLB finds that a petition before it is vexatious and ‘dressed
up’, the only solution would be the dismissal of that petition. This argument
was also rejected. It was held that what is not referable is a dispute properly
within the ambit of s. 397-398 r.w.s. 402: however, if a petition is filed
before the CLB which is ‘dressed up’ as an oppression/mismanagement petition to
avoid an arbitration clause, that petition can be referred to arbitration and
need not be dismissed outright. 

The judgment is
available here.

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Mihir Naniwadekar

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