Oppression/Mismanagement and Arbitration Clauses

We had earlier
briefly noted the decision of the learned Single Judge of the Bombay High Court
in Malhotra v. Malhotra, where it was
held that disputes in a petition properly brought under sections 397-398 of the
Companies Act are not capable of being arbitrated. In essence, the learned
Single Judge held that considering the nature and source of the oppression/mismanagement
remedies and the scope of reliefs which can be granted by the CLB, petitions
u/s 397-398 are not capable of being referred to arbitration. The Court further
held, however, that if the petition is mala fide brought solely to defeat an
arbitration agreement, then the same could be referred to arbitration.
Insofar as this
latter holding is concerned (and assuming that petitions u/s 397-398 are
otherwise not referable to arbitration), it is respectfully submitted that if a
petition is brought u/s 397/398 solely to defeat an arbitration agreement or is
otherwise vexatious or oppressive, that petition can well be dismissed
outright. If it is so dismissed outright there may be no question of any
reference to arbitration: nothing remains to be referred anywhere. However, it
is respectfully submitted that the holding of the Court on the larger issue (that
as a matter of law, petitions bona fide brought
under s. 397-398 are not capable of being referred to arbitration) may require
some further elaboration.
One may usefully
contrast the approach of the Bombay High Court with that of the Court of Appeal
in Fulham v. Richards. The Court of
Appeal was concerned with the analogous question of whether unfair prejudice
petitions can be referred to arbitration. We have discussed the decision in Fulham in detail earlier on this blog. The
Court of Appeal affirmed the judgment of Vos J, holding that “… the determination of whether there
has been unfair prejudice consisting of the breach of an agreement or some
other unconscionable behaviour is plainly capable of being decided by an
arbitrator and it is common ground that an arbitral tribunal constituted under
the FAPL or the FA Rules would have the power to grant the specific relief
sought by Fulham in its s.994 petition. We are not therefore concerned with a
case in which the arbitrator is being asked to grant relief of a kind which
lies outside his powers or forms part of the exclusive jurisdiction of the
court. Nor does the determination of issues of this kind call for some kind of
state intervention in the affairs of the company which only a court can
sanction. A dispute between members of a company or between shareholders and
the board about alleged breaches of the articles of association or a
shareholders’ agreement is an essentially contractual dispute which does not
necessarily engage the rights of creditors or impinge on any statutory
safeguards imposed for the benefit of third parties…

While it is true
to say that remedies u/s 402 are wider than what an arbitral tribunal can grant,
that in itself may not mean that every petition u/s 397-398 necessarily invokes
those reliefs and is therefore incapable as a matter of law of being referred
to arbitration. The approach in Fulham, at first glance, appears distinct from the approach in Malhotra. Fulham appears to leave open some flexibility depending on the nature of the particular dispute
and the nature of the reliefs sought. While the approach in Malhotra (if applied strictly to hold that petitions u/s 397-398 are not at all capable of arbitration) does have the advantage of
certainty, that advantage is to some extent negated by the Court leaving open a
window to argue that petitions are mala fide and “dressed up” and solely brought to evade an
arbitration clause. It may well be possible to hold that where the reliefs are such as can be granted by the arbitral tribunal, then the petition u/s 397-398 is “dressed up” and hence is capable of being referred to arbitration. It remains to be seen how the exceptions laid down by the Court in Malhotra will be interpreted in future: if they are interpreted widely (without insisting on strict demonstration of mala fides, for instance) it may well be that the two approaches can ultimately be reconciled. 

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Mihir Naniwadekar

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