Arbitrability of Oppression and Mismanagement – Rakesh Malhotra & After

[Deepanshi Ahlawat is a 5th year B.A., L.L.B. (Hons.) student at National Law School of India University in Bangalore.

Earlier posts on the topic are available here, here and here]

Introduction

Oppression and mismanagement (“O&M”) disputes in India are governed by sections 241 & 242 of the Companies Act, 2013 (“2013 Act”) [analogous to sections 397, 398 & 402 of the Companies Act, 1956 (“1956 Act”)]. Section 242 of the 2013 Act (or section 402 of the 1956 Act) enlists the reliefs that the National Companies Law Tribunal (“NCLT”) [previously, the Company Law Board (“CLB”)] may grant in these cases. Very often, the agreement of the company with its members provides for arbitration as a method of dispute resolution. The 2013 Act does not postulate any bar on the arbitration of matters related to O&M. But are these disputes arbitrable?

Arbitrability of a matter refers to the question whether a dispute is capable of being settled by arbitration.[1] While sections 8 and 45 of the Arbitration and Conciliation Act, 1996 (“1996 Act”) do not explicitly provide for “arbitrability of the dispute” as a pre-condition for referring parties to arbitration, the same has been read into them by the courts. The matter to be referred should be one that the arbitral tribunal is competent to adjudicate (Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532 (“Booz Allen”); Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd, (1999) 5 SCC 688) (“Haryana Telecom”). The question whether O&M disputes are arbitrable has been a matter of debate over time. This post will seek to analyse the law on this issue, with emphasis on the decision in Rakesh Malhotra v. Rajinder Malhotra, (2015) 2 CompLJ 288 (Bom) (Rakesh Malhotra), and the ramifications of the same. Before proceeding with Rakesh Malhotra, it is important to discuss the earlier position of law.

Pre-Booz Allen Scenario

The Booz Allen case explicitly laid down the test to determine arbitrability of a dispute. Before this decision, the requests for reference of O&M disputes for arbitration were rejected on the ground that only CLB, and not the arbitrator, was empowered to grant the reliefs sought in such these petitions.[2] Additionally, if the issue in these cases could be decided without reference to the terms of the agreements between the parties, it arose out of the rights of members under the 1956/2013 Act or the articles of association and only the CLB had statutory authority to adjudicate it.[3] Other disputes were essentially contractual in nature and could be resolved by a private dispute resolution mechanism. Thus, O&M disputes were considered incapable of being referred to arbitration by their very nature. The Supreme Court in the Booz Allen case solidified this position.

The Booz Allen Case

The Supreme Court was deciding the scope of section 8 of the 1996 Act in an appeal and ruled that the judicial authority seized of the matter must examine “whether the reliefs sought in the suit are those that can be adjudicated and granted in an arbitration”. The Court relied on the decision in Haryana Telecom, where dispute for winding up of a company was held to be a matter that the arbitrator was incompetent to decide because, statutorily, only the court could grant that relief. Thus, the test was that cases relating to actions in rem had to be decided by public fora, while actions in personam could be referred to arbitration. The Court, however, noted that this was not a rigid rule and disputes that related to sub-ordinate rights in personam which arose from a right in rem were arbitrable. The Court further noted that, following the decision in Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya, 2003 (5) SCC 531, under section 8 of the 1996 Act a cause of action could not be bifurcated.  

The Rakesh Malhotra Case

In this appeal from the CLB, one of the issues before the court was whether the disputes under sections 397 and 398 of the 1956 Act could be referred to arbitration and the Court ruled that “having regard to the nature and source of the power invoked” these disputes were not arbitrable. The single judge followed the decision in Haryana Telecom and the Booz Allen test and noted that the reliefs sought in the O&M disputes were in nature of ‘reliefs in rem’ and hence, could not be granted by an arbitral tribunal (Rakesh Malhotra v. Rajinder Malhotra, (2015) 2 CompLJ 288 (Bom)). The Court, however, carved out an exception for cases where the petition filed under section 397/398 was mala fide, vexatious or had been “dressed up” to avoid the arbitration clause. This enquiry had to be made by the CLB while considering an application for reference to arbitration by examining the entire petition as a whole.

Ramifications of the Decision

The rule laid down in Rakesh Malhotra has being criticised for being a blanket ban on all cases of O&M under section 397/398 of the 1956 Act (and now section 241 of 2013 Act). While the decision has provided clarity on the matter and carved an exception, it has taken away the flexibility provided by the pre-Booz Allen and the Booz Allen tests of arbitrability.

The single judge failed to notice that there could be O&M cases under S. 397 which actually involve a contractual breach. These do not pertain to claims where statutory rights of the members have been violated and the wide range of reliefs under section 402 are not sought for. The Court of Appeal in Fulham Football Club (1987) Ltd v. Richards, [2011] EWCA Civ 855, has previously ruled that disputes of this nature can be referred to arbitration since, by nature, they are contractual disputes. However, following the ratio in Rakesh Malhotra, the NCLT might refuse to refer such a petition for arbitration merely because it is a dispute under section 397 and hence, not arbitrable. This problem stems from the fact that Rakesh Malhotra has, in fact, deviated from the test in Booz Allen. The test is Booz Allen is whether the legal right in the dispute is an action in rem or action in personam. However, decision in Rakesh Malhotra is based on the proposition that the reliefs claimed in an O&M petition are reliefs in rem and an arbitral tribunal cannot grant these. The pre-Booz Allen tests were more flexible since the examination was based on the nature of the dispute and whether it can be resolved without reference to the agreements between the parties.

Furthermore, the clarity provided by the judgment in Rakesh Malhotra is taken away by the ambiguous exception that has been created. The NCLT cases have been relying on the principles enunciated in the Rakesh Malhotra whenever seized of an application for reference of an O&M dispute. The nature of the enquiry conducted to determine if the petition is ‘dressed up’ has varied. In some cases, the Bench has, “on a bare glimpse” decided that the petition had been well drafted,[4] in others, the Bench has provided a detailed analysis of the wording of the petition and the reliefs claimed to reach its conclusion.[5] However, in some cases, the Bench conducted an enquiry on merits to decide whether it was actually an O&M case. In the case Sidharth Gupta v. M/s. Getit Infoservices Pvt. Ltd., MANU/CL/0010/2016, the Principal bench of NCLT ruled that there was no malfeasance or malice present in the facts of the case and violation of articles of association would not amount to O&M. It was held to be merely a contractual dispute which could be decided by the arbitral tribunal. Thus, it remains ambiguous whether this enquiry has to be prima facie or if the NCLT is required to examine the question of arbitrability on merits. This also creates an additional burden on the petitioner members of the company who wish to seek reliefs under section 242 of the 2013 Act because they will need to take extra care and ensure that the petition is clear in its terms and does not look like it has been dressed up to circumvent arbitration.

The 2015 amendment to section 8 of the 1996 Act has clarified that the enquiry for the condition of existence of a valid agreement has to be prima facie. In my opinion, the enquiry for determining the implied condition of arbitrability of a subject matter must also be prima facie. The NCLT is only required to scrutinise the manner in which petition has been drafted and the nature of reliefs of the claim, to examine if the dispute has been ‘dressed up’ or is mala fide or vexatious. The powers of the judicial authority here are limited and the question to be determined is whether the subject matter is arbitrable. Whether the allegations of O&M are correct or not is matter to be decided later by the arbitral tribunal.

Conclusion

The question of arbitrability of O&M cases has been decided by the courts in India, time and again. Earlier, the O&M cases were ruled to be non-arbitrable, by their very nature, as only the CLB could exercise wide ranging powers and grant reliefs under section 402 of the 1956 Act. However, the O&M cases by shareholders arising out of the breach of a shareholder agreement or articles of association of the company where the reliefs under section 402 were not claimed, were arbitrable as they were contractual in nature and could be decided only by making a reference to those agreements. The Booz Allen case, while ruling on the condition of arbitrability of a dispute, solidified this position by postulating the test of ‘actions in rem v. actions in personam’. However, the decision of the Bombay HC in Rakesh Malhotra postulated a rigid rule wherein no O&M dispute can be referred to arbitration, unless it is shown that the petition was mala fide, vexatious or dressed up to avoid arbitration. This blanket ban will affect the enquiry in O&M cases where the dispute involved is contractual in nature. The ambiguity of the exception laid down in this case has also been criticised.

While the SC decision in Haryana Telecom remains the binding word on the question of arbitrability of O&M disputes, the NCLT benches, in recent decisions, have been relying on the ratio of Rakesh Malhotra. It is hoped that these authorities do adopt a flexible approach and examine the nature of each O&M dispute before ruling on its arbitrability.      

Deepanshi Ahlawat

[1] V. Reddy & V. Nagaraj, Arbitrability: The Indian Perspective, 19(2) Journal of International Arbitration 117, 119 (2002).

[2] Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd, (1999) 5 SCC 688; Das Lager Way Wind Turbines P Ltd. v. Cynosure Investments P Ltd., (2007) 80 CLA 211 (Mad); O P Gupta v. Sfflv General Finance (P) Ltd., [1977] 47 CompCas 279 (Del); Altek Lammertz Needles Limited v. Lammertz Industrienadel GmbH, [2006] 129 CompCas 108 (CLB).

[3] Rajendra Kumar Tekriwal v. Unique Constructions P. Ltd., [2009] 147 CompCas737 (CLB); E Logistics v. Financial Technologies, [2007] 139 CompCas 311 (CLB); Shri Gautam Kapoor v. Limrose Engineering, [2007] 137 CompCas 513 (CLB); R  Balakrishnan and Ors. v. Vijay Dairy and Farm Products Private Limited and Ors., [2005] 125 CompCas 661 (CLB); Escorts Finance v. G R Solvents [1999] 96 CompCas 323 (CLB).

[4] Punita Khatter v. Explorers Travels and Tours Private Limited, [2017] 201 CompCas 178; Gaurav Chaturvedi v. Girdhar Gopal Bajoria, MANU/CL/0079/2014.

[5] Grass Lands Agro Private Ltd. v. R S Mohammed Saleem, MANU/NC/0118/2017; Ramnish Kumar Sharm v. D R Johns Lab Pvt. Ltd., MANU/NC/0112/2016; Avigo PE Investments Ltd. v. Tecpro Engineers Ltd., MANU/CL/0009/2016.

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