Wednesday, June 12, 2013

Arbitration of Shareholder Disputes

In an article in the Financial Express, my colleague Debashish Sankhari and I have looked at whether disputes of oppression and mismanagement in relation to the affairs of a company can be adjudicated through arbitration. This is an important practical question for many a financial investor (and even a long-term strategic investor) who has agreed to arbitration clauses in the investment/ shareholder agreements, and which may also have been incorporated in the articles of association of the company.

After examining various CLB orders and the Supreme Court judgement in Booz Allen & Hamilton, we come to the conclusion that the test to determine as to whether the matter/ claim of oppression and mismanagement is to be relegated to arbitration is to examine as to whether the allegations of oppression/mismanagement can by adjudicated without reference to the terms of the arbitration agreement. In other words, the nature of the allegations should be such that if established, it could definitely be declared as an act of oppression/ mismanagement. In such cases, the matter cannot be referred to arbitration.

-- Satyajit Gupta


vswami said...

On the first blush, one is perforce tempted to raise the falling basic points of doubt and posers of a fundamental but intricate nature:
As per one’s understanding, the dispute is primarily centered on the issue whether it is ‘arbitrable’ , or should it be necessarily adjudicated on ONLY by court. And, as noted from the sum -up in the concluding paragraph 30, the apex court has handed down its view favoring the latter mentioned proposition.

A few of the thoughts, one may wish to share with legal fraternity, with a view to provoking an analytical study by them in proper light, are briefly these:

1. On the matrix of facts as gathered from the SC judgment, it seems that, the property to which the dispute / primary issue raised related are 2 “Flats” situate in Mumbai. On the premise that , therefore, it is a property which is governed by the special State enactment called,- The Maharashtra Ownership Flats Act (rtw its Rules), the implications thereof would be of every relevance.
2.According to the commonly understood, so also lately accepted, legal position, under the special enactment, while purchase of a “Flat” is by individual party, the entire property (-“ the property”, with all its attendant rights and interests) in the land and building, of which the “Flat” is a unit, vests with the co-operative housing society, as eventually formed and registered by the body of co-purchasers. And, it is only to such a co-operative society (as opposed to/distinct from the individual Flats purchasers), -as unequivocally mandated by the special law, -that transfer of the title to “the property”, along with handover of its possession, has to be effected.

If due regard be had to the foregoing facets, and kept in sharp focus, to one’s mind, a serious doubt that arises upfront is this:
Should not the co-operative housing society, - assuming that there is one in place in the instant case- be made a necessary party?

Perhaps, no pleas or arguments were made; and that explains why the court had no occasion to consider the foregoing peculiar clinching aspects.

Be that as it may, the concluding portion of the SC Judgment reads,- “We however make it clear that we have not recorded any finding, nor expressed any opinion, on the merits of the claims and disputes in the suit.” As such, it is possible/may be expected that, in the further impending proceedings, all such additional pleas and arguments, as briefly indicated, might come to be advanced, and adjudicated on.

Now, over to the legal pundits with erudite learning / knowledge, for a further in-depth study and profoundly useful elucidation / comments.

vswami said...

Sharing further personal thoughts:
Among others, the write-up has placed reliance on the SC case cited and quoted in re. Booz Allen & Hamilton for canvassing and finding support for the propositions advanced and discussed, Seen to be resting on the issue of wheher it is arbitration or court litigation, whch one of the two courses of action open in a given case if it is a shareholder dispute. Prima facie, the discussion has concentrated on the rather too technical or mindboggling debate; not a straightforward and simple logicality.

Be that as it should, as pinpointed in the previous comment, the SC case was not one directly on the aspect of 'mismanagement ', so on s in a shareholder dispute; but is one settling a dispute between parties to transactions related to property rights, that too of a special kind- that is, in Flats in a building.

As such, one fails to see as to why the SC case can at all be regarded, even remotely, to be of guidance much less of direct relevance or inspiration in regard to a case involving shareholder disputes. The learned authors of the write-up will, for their own satisfaction, do well to do some rethinking over the matter.