Arbitrability of Oppression and Mismanagement in India

Guest

5 years ago

[Guest post by Aishwarya Singh, 5th year student at Jindal Global Law School]

Background

Sections 241 and 242 of the Companies Act, 2013 (“CA, 2013”) provide the National Company Law Tribunal (“NCLT”) the present day authority to deal with the petitions pertaining to oppression and mismanagement. Under the previous Companies Act, 1956 (“CA, 1956”), this power was exercised by the Company Law Board (“CLB”). The NCLT under the CA, 2013 is vested with a wide range of reliefs in respect of issues dealing with oppression and mismanagement. Nowhere in the provisions of CA, 2013 has it been mentioned that arbitration is barred under such matters. Hence, in the event that an agreement contains a clause of arbitration mutually agreed upon by the parties, then even under cases of oppression and mismanagement, prima facie it looks possible for the parties to go for arbitration under such matters. This position emerges from a reading of section 244 of the CA, 2013 along with sections 8 and 45 of the Arbitration & Conciliation Act, 1996, (the “Arbitration Act”). On the other hand, it is reasoned that there cannot be two forums for hearing on the same dispute and the NCLT, having been vested with the statutory authority, is the forum conveniens for hearing such matters.

Analysis

The most debatable question regarding this area of law has always been whether disputes pertaining to the matter of oppression and mismanagement under sections 241 and 242 of the CA, 2013 can be resolved by way of arbitration.

The most common answer to this query is that not all disputes can be arbitrated.[1] For instance, as stated by Russell, “only the disputes affecting civil rights may be referred to arbitration”.[2] The complexity of this issue is by virtue of the fact that the NCLT has been conferred jurisdiction by sections 241 and 242 of the CA, 2013 to try disputes related to oppression and mismanagement. In other words, jurisdiction is conferred by statute and not by any agreement between the parties. Section 8 of the Arbitration Act states that a judicial authority before which an action is brought in a matter which is the subject matter of an arbitration agreement must refer the parties to arbitration. It is the mandatory nature of section 8 of Arbitration Act which has been an issue of much controversy and judicial interpretation.[3] It is pertinent to mention that certain disputes such as divorce proceedings, winding up of the companies, insolvency and landlord tenant disputes are not arbitrable and can be determined only by the concerned judicial authority.

The question of arbitrability of oppression and mismanagement disputes was considered by the Bombay High Court in the case of Rakesh Malhotra v. Rajinder Malhotra.[4] The Bombay High Court concluded that considering the wide and special powers bestowed upon the CLB (the predecessor of the NCLT) under section 402 of the CA 1956 (now under section 242, CA, 2013) and that the same powers are not available with an arbitral tribunal, the disputes under sections 397 and 398 of the CA Act, 1956 (now under sections 241 and 242 of the CA, 2013) are not capable of being referred to arbitration. This judgment has sought to provide much needed clarity on the subject as it provides for the general view adopted by the judiciary to deal with such disputes.

It is a settled principle that legislature has the authority to reserve adjudication of certain categories of proceedings as a matter of public policy;[5] therefore, in a dispute involving a right in rem cannot be referred to arbitration due to its nature that affects third party rights.[6] However, accordingly, disputes that involve right in personam, i.e., affecting only parties involved under the agreement can be referred to arbitration. Therefore, while dealing with petitions for oppression or mismanagement, courts have adopted a fact based approach[7] and reference to arbitration has been granted when the dispute arose from an agreement, which contained an arbitration clause.[8] It has been held that reference to arbitration is mandatory when the reliefs were directly flowing from an agreement and were part of the subject matter of the agreement.[9]

In the case of Haryana Telecom v. Sterlite,[10] it was held that the only disputes which can be referred to arbitration are those which an arbitrator is competent to decide on. It was further observed by the same court that notwithstanding the agreement between the parties, the arbitrator will have no jurisdiction to order winding up of a company since such a power is only conferred upon the Court under the Act. An arbitral tribunal is traditionally, statutorily and jurisprudentially, incapable of making an award to wind-up a company, the reason behind this is that by doing so can jeopardise the tribunal’s power within the context of ‘Indian public policy’. So, is it possible to let a 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, I argue that this proposition fails at the very outset.

Further, it has been opined that civil proceedings not involving proceedings in rem or public rights can be adjudicated by arbitral tribunal, if the claim is disputed under sections 241 or 242 of the CA, 2013 is inter-parties in nature.[11] This then brings us to the issue of commonality of parties. What must be decided is whether parties to a petition under sections 241 and 242 of the CA, 2013 and the arbitration agreement are common. More often than not, the answer is in the negative. The issue of commonality of parties in relation to civil suit has already been settled by the Supreme Court in the landmark decision in Sukanya.[12] The Court observed that where a suit involved parties, some of whom were parties to an arbitration agreement and others were not, section 8 of the Arbitration Act would not be attracted.

The Bombay High Court in the case of Rakesh Malhotra clubbed all these propositions and held that:

It must therefore follow that where a petition under Chapter VI of the Companies Act, 1956 seeks reliefs some of which are in the nature of reliefs in rem and others that are in personam, then it is not possible or permissible to sever one from the other and disassemble such a petition…. Haryana Telecom, to my mind, though in a petition for winding up, and clearly, therefore, a matter in rem, states as a proposition that no agreement between the parties can vest an arbitral panel with the power of winding up. Similarly, no arbitration agreement can vest an arbitral tribunal with the powers to grant the kind of reliefs against oppression and mismanagement that the CLB) might.

Thus, the Court has considered the very inherent nature and characteristics of oppression and mismanagement disputes and the nature of rights i.e. rights in rem involved therein. The court has therefore reasoned that because oppression and mismanagement disputes involve in rem rights they are not arbitrable. In any case, even if the oppression and mismanagement involves some in personam rights and other in rem rights, there can be no severance of the rights involved and hence the dispute cannot be referred to arbitration.

The Court has thereafter also considered the wide scope of reliefs which can be granted by the NCLT. It examined the proposition that the powers of the NCLT under section 242 of the CA, 2013 are wide enough to permit it to interfere with the normal corporate management of a company and to supplant the entire corporate management. Considering that these reliefs cannot be given by an arbitral tribunal, the Court concluded: “The disputes in a petition properly brought under Sections 397 and 398 read with Section 402of the Companies Act, 1956 are not capable of being referred to arbitration, having regard to the nature and source of the power invoked.”[13]

Exception to the above Rule

Although disputes under sections 241 and 242 of the CA, 2013 are not amenable to arbitration, this does not preclude the NCLT from entertaining an application under sections 8 or 45 of the Arbitration Act for reference of a matter to arbitration. Courts have been quick in providing cautionary judgments which state that where parties, who 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.[14] The courts have held that by mere clever drafting of the petition, the substance of the suit should not be changed before the court,[15]and that while determining the nature of suit, it is the duty of the court to look at the real substance of the suit and the legal ingenuity in drafting the plaint.[16] If the court opts to look at the source of power or power that can be exercised by the arbitrator, then it might lead to parties misusing this procedure by clever drafting of the petition so as to evade arbitration.

In this regard, the court in Rakesh Malhotra held:

a petition that is merely ‘dressed up’ and seeks, in the guise of an oppression and mismanagement petition, to oust an arbitration clause, or a petition that is itself vexatious, oppressive, mala fide (or, at any rate, not bona fide) cannot be permitted to succeed. In assessing an allegation of ‘dressing up’, the Section 397 and 398 of the Companies Act, 1956 petition must be read as a whole, including its grounds and the reliefs sought.

The court further held:

….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.

It is pertinent to note here that it is not sufficient to merely establish that the reliefs sought before the NCLT comes within the scope of relief that may be granted by an arbitrator. The applicant has additionally to prove that the company petition under section 241 or 242 of the CA, 2013 has been filed with a dishonest intention to evade the arbitration clause. What is “vexatious” or “dressed-up” is not clarified by the Court and the same will attract some uncertainties in the future and would require a clear interpretation.

The Bombay High Court has thus laid down the general rule that per se disputes pertaining to oppression and mismanagement are not amenable to arbitration, subject to the exception set out above. However, categorically stating that oppression mismanagement disputes are not arbitrable may be considered an extreme approach. If a dispute under section 241 or 241 primarily emanates from a breach of the shareholders agreement or a joint venture agreement, i.e. the dispute is principally a breach of contract and no special relief under section 242 of the CA, 2013 is claimed, then in that case there is no reason why the arbitration agreement between the parties should not be honoured. Therefore, if the grievance of the petitioner substantially rests upon the breach of the shareholders agreement and infringement of the rights under the shareholders agreement, then it may be possible for the dispute to be referred to arbitration. Such cases can very well be referred to arbitration under section 8 / 45 of the Arbitration Act. There may also be a situation where a certain set of facts may give rise to a situation where a party is able to claim two separate and distinct reliefs: one a special relief under section 242 of the CA, 2013 in a company petition for oppression and mismanagement and the other for breach of contract / damages by way of arbitration. These two remedies are distinct and pursuing them simultaneously is not barred in any case. The same may well proceed concurrently.

Conclusion

The competency of courts to interfere in company’s management in the interest of minority shareholders is not restricted. An arbitration clause is not a valid ground to bar a court from exercising its jurisdiction. Matters which fall within the purview of sections 241 and 242 of the CA, 2013 cannot be left to arbitration. However, a deeper analysis suggests that if the subject matter of both the proceedings is different, then proceedings initiated before a court are tenable. The decision by the Bombay High Court in Rakesh Malhotra does away with confusion and obscurity by pronouncing a definite position of the law on the matter.

– Aishwarya Singh

[1] G England and I McKenna Arbitrability Restrictions in Action, Relations Industrielles/Industrial Relations, Vol. 47, No. 2 (Spring 1992), pp. 279–99; ‘Arbitrability’ of Labour Disputes, Virginia Law Review, Vol. 47, No. 7 (November 1961), pp. 1182–208.

[2] D Sutton and J Gill Russell on Arbitration (22nd edn Sweet & Maxwell Publications), p. 28.

[3]P Anand Gajapathi Raju v. P V G Raju 2000 4 SCC 539.

[4] MANU/MH/1309/2014

[5] C B Manzoni, ‘Arbitration in Public Sector’ (1981) 1 (2) The Labour Lawyer 454

[6] Booz Allen & Hamilton Inc v SBI Home Finance and Ors (2012) 173 CompCas 184 (SC)

[7] Fulham Football Club v Richards 2011 EWCA Civ 855

[8] CLB v Saz C/SCA/2179/2014; Escorts Finance v G R Solvents 1999 96 CompCas 323 CLB.

[9] E Logistics v Financial Technologies 2007 139 CompCas 311 CLB

[10] 1999 97 CompCas 675 P H

[11] CLB v Saz C/SCA/2179/2014; Escorts Finance v G R Solvents 1999 96 Comp Cas 323 CLB.

[12] Sukanya Holdings (P) Ltd v. Jayesh H. Pandya (2003) 5 SCC 531

[13] Note 5 above.