Arbitration In IndiaArbitrability of Disputes under Sections 241 and 242 of the Companies Act, 2013

October 28, 20210

INTRODUCTION

With the growing relevance of arbitration in the commercial era, an efficient settlement of disputes through arbitration has become preferable over resolution of disputes by Courts and Tribunals. Attributable to such demand for arbitration, the debate over arbitrability of disputes under Sections 241 and 242 of the Companies Act, 2013 relating to Oppression and Mismanagement, have gained grounds.

The nature of claims involved, the elaborate reliefs sought and the exclusive powers of the Adjudicating Authority, i.e., the National Company Law Tribunal (“NCLT”) under the aforementioned Sections contribute to the lack of clarity in the ambit of arbitrability of disputes in matters relating to oppression and mismanagement.

The precondition to arbitration is a determination of arbitrability of the dispute. In the Indian context, the only statutory reference to the term ‘arbitrability’ is under Section 2(3) of the Arbitration and Conciliation Act, 1996. Consequently, the jurisprudence on arbitrability of disputes in India is based on the interpretations of statutory provisions by the Courts and Tribunals.

Mindful of the significance of such determination, quite a few tests for arbitrability have been put forth, including the test of ‘in rem’ and ‘in personam’, the remedies test, the claims test and so on.

In an attempt to settle this debate, this article navigates through the concept of arbitrability of disputes and the jurisprudence to highlight the current position of law with respect to the arbitrability of disputes under Sections 241 and 242 of the Companies Act, 2013.

 

ARBITRABILITY OF DISPUTES

Arbitrability of a dispute refers to the capability of the subject matter of the dispute to be decided through arbitration. With no definite meaning assigned to the term, arbitrability is determined by the three-prong test laid down by the Supreme Court in Booz Allen and Hamilton Inc. v. SBI Home Finance Limited (2011) 5 SCC 532 (hereinafter referred to as “the Booz Allen Case”). The tests follow a determination of the following questions:

  • Whether the disputes are capable of adjudication and settlement by arbitration?
  • Whether the disputes are covered by the arbitration agreement?
  • Whether the parties have referred the disputes to arbitration?

Owing to the factual nature of the last two tests, the question of arbitrability of a dispute based on legal aspects shall be addressed by assessing whether the disputes are capable of adjudication and settlement through arbitration.

As reiterated by the Supreme Court in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. (2021) 4 SCC 379, the Arbitration Act, 1996 does not exclude any category of disputes as non-arbitrable. However, as a matter of public policy, legislatures across jurisdictions reserve certain disputes falling in the domain of public law for adjudication by Courts and Tribunals. In pursuance of the same, Section 2(3) of the Arbitration Act, 1996 recognizes that certain disputes may not be submitted to arbitration.

 

Rights in rem and in personam

The Black’s Law Dictionary recognizes a right in rem as a right exercisable against the world at large, and a right in personam as an interest that is protected only against specific individuals.

The Supreme Court in the Booz Allen Case clarified that the disputes around a right in personam are arbitrable whereas any lis in rem must be adjudicated by Courts and Public Tribunals, and is therefore, not arbitrable. As an exception to the aforementioned rule, the Supreme Court also stated that disputes relating to subordinate rights in personam arising from rights in rem may be arbitrable.

However, such exception was effectively nullified by the Supreme Court in Sukanya Holdings (P) Ltd. v. Jayesh H Pandya (2003) 5 SCC 351 which disallowed the bifurcation of the subject matter of an action based on the reasoning that had the legislature contemplated such bifurcation, it would have used appropriate language to permit the same.

 

ARBITRABILITY OF DISPUTES RELATING TO OPPRESSION AND MISMANAGEMENT

Oppression has been defined under Section 241 (a) of the Companies Act, 2013 as:

“(a) the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company

Similarly, Section 241 (b) of the Companies Act, 2013 defines Mismanagement as:

“(b) the material change, not being a change brought about by, or in the interests of, any creditors, including debenture holders or any class of shareholders of the company, has taken place in the management or control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the company’s shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members

By virtue of Section 241 read with Section 244 of the Companies Act, 2013, any member entitled to file a complaint for Oppression or Mismanagement can apply to the NCLT for the same.

Accordingly, claims for Oppression or Mismanagement can be filed by aggrieved member(s) against the oppressing members(s) or the material change, which appears to fall under rights in personam. However, on a closer scrutiny, it can be seen that such claims arise from activities undertaken in a manner prejudicial to the public interest, thereby suggesting the existence of rights in rem.

In this context, while determining the question of arbitrability in the Booz Allen Case, the Supreme Court implicitly acknowledged the Remedies Test for arbitrability. Quoting Russell on Arbitration, the Court held that when the relief sought by a party has an effect in rem, the relief cannot be granted by a private forum and the dispute would therefore be non-arbitrable. Thus, where reliefs against Oppression and Mismanagement entail an idea of public interest, they become non-arbitrable as held in the Booz Allen Case.

The Supreme Court in All India Power Engineer Federation v. Sasan Power Ltd. (2017) 1 SCC 487 reiterated the position of law relating to waiver of rights and held that any statutory right vested in public interest cannot be waived even through voluntarily executed contracts. Thus, matters involving Oppression and Mismanagement under the Companies Act, 2013 being statutory rights in rem vested in public interest, are not arbitrable.

Accentuating the above view, the Bombay High Court in Rakesh Malhotra v. Rajinder Malhotra (2015) 127 CLA 140 (hereinafter referred to as “Rakesh Malhotra Case”) stated that vide Section 402 of the Companies Act, 1956 (analogous to Section 242 of the Companies Act, 2013), the Company Law Board (“CLB”) was empowered to substitute the management, and regulate the affairs of the company, among other things. Since the power to provide such relief is enjoyed exclusively by the CLB, no arbitration agreement can empower the arbitral tribunal to grant such reliefs, making the claims of Oppression and Mismanagement non-arbitrable.

Taking into consideration the view that Oppression and Mismanagement are pertaining to rights in personam, such as questions of succession or ownership of shares, the observations of the Bombay High Court in Kingfisher Airlines Limited v. Capt. Prithvi Malhotra Instructor (2013) 136 FLR 733 emphasize that even in disputes relating to rights in personam, the claims may be considered non-arbitrable when the laws in force exclusively reserve such disputes for adjudication by a public forum.

Under Section 242 of the Companies Act, 2013, a winding up order may be passed on just and equitable grounds by the NCLT for issues of Oppression or Mismanagement. Accordingly, in the case of Dhananjay Mishra v. Dynatron Services Private Limited Company Appeal (AT) No. 389/2018 the National Company Law Appellate Tribunal (“NCLAT”) held that an arbitrator would have no jurisdiction to pass a winding up order on the ground that it is just and equitable as it falls within the exclusive domain of the NCLT under Section 271(e) of the Companies Act, 2013.

Hence, so long as the adjudication of claims under Section 241 and 242 of the Companies Act, 2013 is exclusively reserved for the NCLT, such claims cannot be adjudicated by an Arbitral Tribunal.

 

Arguments in favour of Arbitrability

In certain situations, a party may ‘dress up’ the dispute as falling within the ambit of Sections 241 and 242 of the Companies Act, 2013 to include reliefs that can only be granted through the statutory Tribunal, i.e., NCLT. The judgment in the Rakesh Malhotra Case acknowledged the issue of such ‘dressed up’ petitions driven with vexatious, mala fide and mischievous intentions to evade an arbitration clause; and emphasised the duty of the NCLT to look into the real substance of the suit and allow arbitration if the petition is found to be a ‘dressed up’ claim.

The CLB adopted a similar approach in Sidharth Gupta v. Getit Infoservices (P) Ltd. MANU/CL/0010/2016 and opined that the petition was a ‘dressed up’ claim of Oppression and Mismanagement, and that the matter may be referred to arbitration.

Similarly, the Court of Appeal in the United Kingdom allowed for the arbitration of claims of Oppression and Mismanagement arising solely out of a contractual breach in the case of Fulham Football Club (1987) Ltd. v. Richards (2011) EWCA Civ 855.

 

AMLEGALS REMARKS

The question of arbitrability of a dispute revolves around the capability of the dispute to be settled through arbitration. While determining the arbitrability of disputes under Sections 241 and 242 of the Companies Act, 2013, one has to be mindful of any express or implied bars on such arbitration under the Companies Act, 2013.

As established by the jurisprudence surrounding the Arbitration Act, 1996, it is clear that arbitration is allowed for civil and commercial disputes. However, Section 430 of the Companies Act, 2013 bars a civil court from entertaining matters relating to Oppression and Mismanagement. Such exclusive jurisdiction conferred on the statutory Tribunal, i.e. NCLT, may be construed as an implied bar on arbitration of disputes pertaining to Sections 241 and 242 of the Companies Act, 2013.

From the aforementioned judicial precedents concerning arbitration of disputes of Oppression and Mismanagement, it can be concluded that an Arbitral Tribunal is not empowered to adjudicate disputes under Sections 241 and 242 of the Companies Act, 2013 and hence, such matters cannot be referred to arbitration.

However, with the constant evolution of law and emergence of arbitration as the most efficient mode of settlement of disputes, it has become the need of the hour to revisit the position of law regarding arbitrability of Oppression and Mismanagement to facilitate efficient disposal of disputes.

 

TEAM AMLEGALS, assisted by Ms. Anumeha Smiti (Intern)


For any query or feedback, please feel free to get in touch with rohit.lalwani@amlegals.com or riddhi.dutta@amlegals.com.

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