Tuesday, November 19, 2013

Guest Post: Arbitrating Oppression and Mismanagement

(In the following post, Mr Gursharan Virk, Advocate, Singhi & Co, considers the law on the arbitrability of claims involving oppression and mismanagement)

Can an arbitration clause alienate the erstwhile inalienable statutory right of a shareholder under sections 397-399 of the Companies Act, 1956 (the ‘Act’)?

The fundamental issue here is whether rights ‘in rem’, available under sections 397-399 of the Act, are capable of being decided by arbitrators? This question arises because remedies which the arbitrator can award are limited by considerations of public policy and by the fact that he is appointed by the parties and not by the State. For example, he cannot impose a fine or a term of imprisonment, commit a person for contempt or issue a writ of subpoena; nor can he make an award which is binding on third parties or affects the public at large. This proposition has been discussed in Fulham.

The language of section 397 of the Act is crystal clear. It reads “…(2) If…the Company Law Board is of the opinion - …(b) that to wind up the company would unfairly prejudice the member or members, but that otherwise the facts would justify the making of a winding up order…”. Thus, a petition under section 397 of the Act presupposes the making of a winding up order of the company as justifiable. So, if one were to argue that issues under ss.397-399 be relegated to arbitration (presuming that a valid arbitration clause exists), one would have to first establish that an arbitrator can wind-up a company. The Apex Court, in Haryana Telecom v. Sterlite., has unequivocally stated that only such disputes which an arbitrator is competent or empowered to decide can be referred to arbitration. The Court further observed that an arbitrator, notwithstanding any agreement between the parties, would have no jurisdiction to order winding up of a company since such power is conferred on a court by the Act.

I am somewhat skeptical about the alternative proposition enunciated by some cases which states that the arbitral tribunal need only be satisfied that grounds for winding-up the company in question exist. The reason for my skepticism is because an arbitral tribunal is traditionally, statutorily and jurisprudentially incapable of making an award to wind-up a company. This is because doing so will lock the tribunal’s horns with ‘Indian public policy’, and rightly so. So, can we let 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, this alternative proposition, in my humble opinion, fails at the outset.

Nonetheless, some Indian Courts and Tribunals have gone ahead and relegated issues, which were earlier under exclusive jurisdiction of the Company Law Board, to arbitration.

This brings us the issue of commonality of parties. What must be decided is whether parties to a petition under ss.397-399 and the arbitration agreement are common. More often than not, the answer is in the negative. Complicated questions of the company in question being signatory to the shareholders’ agreement executed between shareholders, terms of the shareholders’ agreement incorporated in the articles of association of the company, etc. have arisen in various cases. The issue of commonality of parties in relation to civil suit has already been settled by the Apex Court in the landmark decision in Sukanya. The Apex Court observed that where a suit involved parties, some of who were parties to an arbitration agreement and some were not, section 8 of the Arbitration and Conciliation Act, 1996 would not be attracted. With reference to ss.397-399, the issue now stands settled by the decision in Rajendra Kumar Tekriwal, and the decision of the Delhi High Court in the case of Ajay Kirti Kumar Dalmia v. Company Law Board & Ors., [(2009) 148 Company Cases 742 (Delhi)]. Now, at this juncture, it is pertinent to mention that the Apex Court, in deciding whether the proposition laid down in Sukanya Holdings (supra) was correct, in Chloro Controls, while upholding (and somewhat, distinguishing) Sukanya Holdings, observed that in Sukanya, the question of commonality of causes of action and parties was decided in light of section 8 of the Arbitration and Conciliation Act, 1996. Furthermore, a suit had been filed for dissolution of partnership firm and accounts also challenging the conveyance deed executed by the partnership firm in favour of one of the parties to the suit. The Apex Court, noticing the facts of the case, emphasized that where the subject matter of the suit includes subject matter for arbitration agreement as well as other disputes, the Court did not refer the matter to arbitration in terms of Section 8 of the Act. Thus, it would be appropriate to state that Sukanya can still be considered good law when read with the comments made to further expropriate it in Chloro Controls (supra).

But, in the interest of neutrality, it would be appropriate to mention that Courts have been quick in providing cautionary judgments which state that where, parties which 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. Relevant cases in point are decisions of the Delhi High Court in Delhi Express Travel Pvt. Ltd. v. International Air Transport Association & Ors. (MANU/DE/0739/2009) and W.P.I.L. v. NTPC. It goes without saying that these decisions were made in light of facts raised in those cases and a decision as to commonality of parties would, obviously, not be subject to a straightjacket rule.

In some cases, like in Dr. G. L. Purohit v. Dr. S.S. Agarwal, [(2011) 163 Company Cases 205 (CLB)], the peculiar issue being dealt with was a company, which was not party to the arbitration agreement, offering to ‘voluntarily’ relegate itself to arbitration. Rightly so, the Hon’ble Company Law Board rejected this argument and reiterated that a party-respondent, not signatory to arbitration agreement, could not offer to be bound by arbitration and could not participate in arbitration proceedings.

The next test that may be applied to decide the arbitrability of issues traditionally raised under ss. 397-399 is whether the said issues are capable of being decided without reference to the terms of the agreement encompassed by an arbitration clause. It can be safely said that if the matter relates to oppression/mismanagement directly relating to the rights of or benefits to the shareholders in their capacity as members of the company arising out of the provisions of the Act, the articles of association of the company or on equitable grounds, the issues are not required to be referred to arbitration. This proposition has been enunciated by the Principal Bench of the Hon’ble Company Law Board in Enercon, Altek Lammertz Needle Ltd., but most clearly and dare I say, beautifully, in the case of Rajendra Kumar Tekriwal (supra).

We must not forget that, by its very nature, a petition under ss. 397-399 of the Act is a proceeding in rem. It is essentially a derivative action by the shareholder for the benefit of the Company. This proposition has been discussed and affirmed by the Apex Court in the case of Booz Allen.

The very concept of alternative dispute resolution does not, unless expressly specified, render jurisdictional exclusivity to a tribunal. Though this proposition still lies in a grey area, one thing is certain; that an arbitration clause would not render otiose, statutory remedies which would commonly have been made available to a shareholder of a company. In cases where the language of the arbitration agreement is such that it does not amount to waiver of other rights and remedies available under statute, there would definitely not be an obligation of a judicial authority to refer matters to arbitration. Would this stand, in effect, destroy the very essence of speedy and private justice that arbitration seeks to provide? This question still remains unanswered.

As was held in the case of Sporting Pastime., the scope of the Company Law Board to grant reliefs under section 402 of the Act is much wider as compared to the reliefs which can be granted by an arbitrator. This is another argument oft-rendered by Courts and Tribunals while granting statutory superiority to the Company Law Board over arbitral tribunals.

Under the new law, i.e. Companies Act, 2013, sections 397, 398, 401, 402, 403 and 404 of the existing law, i.e. Companies Act, 1956 have been clubbed into sections 241 and 242. The propositions under new sections are fairly similar and somewhat para materia the existing sections and thus, it appears, that the new law will not silence the controversy at hand.

To conclude, the Chancery Division has, in a fine judgment, in the case of Exeter City AFC, reasoned that “…if the right to petition to wind up conferred on every single shareholder is a condition of incorporation under the Companies Act, then so in my judgment is the right to petition for relief against unfair prejudice…the statutory rights conferred on shareholders to apply for relief at any stage are, in my judgment, inalienable and cannot be diminished or removed by contract or otherwise.” Though this decision now stands oveeruled by Fulham (supra), in my view, it leaves an important imprint in the development of an area of Company Law which will definitely see some hustle-bustle in times to come. Giving due respect to the decision in Fulham, one cannot overlook the fact that that decision overruled Exeter based on a proposition of factual vagaries. The broader proposition laid down in Exeter still holds true, in my opinion, specially for an adolescent jurisdiction like India, because the rights of shareholders (who, in the Indian scenario, are not always well informed, literate, capable of exercising their rights independently, etc.), would be unfairly prejudiced if private adjudications by and before party appointed arbitral tribunals were to be permitted to decide their fate.

It remains to be conclusively decided as to who will gain territorial foreground in the battle to adjudicate oppression/mismanagement cases, the arbitral tribunal or the Company Law Board.

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