Monday, August 25, 2014

Are disputes in s. 397-398 petitions capable of being referred to arbitration?

A learned Single Judge of the Bombay High Court recently considered (in Rakesh Malhotra v. Rajinder Malhotra) the question of whether disputes before the CLB under ss. 397-398 and 402 of the Companies Act, 1956 are capable of being referred to arbitration. 

Patel J. concluded that having regard to the nature and source of the powers of the CLB, disputes in petition properly brought under ss. 397-398 are not capable of being referred to arbitration. His Lordship clarified that mala fide, vexatious, oppressive or “dressed up” petitions can be so referred. In other words, in petitions under ss. 397-398 read with s. 402, “… 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…” 

The Court noted that there was a difference between what a civil court could do in a derivative action or shareholder action, and what a specially empowered authority such as the CLB can do. The powers in s. 402(a) to (g) were held to be of such expansive nature that no arbitral tribunal could be called upon to exercise such powers. It was argued before the Court that (a) the CLB always has the power to refer parties to a civil suit, and (b) in a civil suit, disputes within the ambit of an arbitration clause would necessarily have to be referred to arbitration, therefore (c) actions before the CLB were also referable to arbitration. This argument was not accepted; with the learned Single Judge characterizing the argument as an example of the fallacy of the undistributed middle. The learned Single Judge placed reliance on Sukanya, Booz Allen, Haryana Telecom and Bennett Coleman

It was further argued that in case the CLB finds that a petition before it is vexatious and ‘dressed up’, the only solution would be the dismissal of that petition. This argument was also rejected. It was held that what is not referable is a dispute properly within the ambit of s. 397-398 r.w.s. 402: however, if a petition is filed before the CLB which is ‘dressed up’ as an oppression/mismanagement petition to avoid an arbitration clause, that petition can be referred to arbitration and need not be dismissed outright. 

The judgment is available here.

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