Arbitration v. Court: Examining the Arbitrability of Shareholder Disputes in India
Amit Kumar
3rd Year, B.A. LL.B(Hons.), Chanakya National Law University, Patna
Introduction
Lately, with the boom in business activity in India, the parties across the country are entering into various complex business transaction agreements exploring the new opportunities which were unavailable previously. This has resulted in opening myriad of opportunities for generation of wealth as well as giving rise to various economic disputes. As a result, the disputes between shareholders in India have become commonplace. These disputes arise upon the violation of Shareholder’s Agreement (“SHAs”) governing the relationship between the shareholders as well as the shareholders and the company. Usually, the disputes pertain to the company’s operation and management. The SHAs, mainly, contain the restriction on transfer of shares, rights and obligations, voting rights, dispute resolution and so on. In recent times, there is debate around the enforceability of clauses of the SHAs agreement which has not been incorporated in the Article of Association, though this is not the subject matter of discussion in this article.
Arbitrablity of SHA Dispute in India
Usually, the disputes in shareholders’ agreement pertain to oppression and mismanagement. It is remedied under section 241 and 242 of the Companies Act, 2013 where the National Company Law Tribunal (“NCLT”) have exclusive jurisdiction to grant relief. However, with the rise of shareholders’ activism and incorporation of arbitration clause in the SHAs, the Indian Courts have faced with the issue of arbitrability of such disputes arising of shareholders’ agreements. Though, there is scattered view of Indian Courts with respect to the arbitrability of shareholders’ disputes. Thus, such incoherence on such issues has complicated the regime of arbitration law in India.
Unlike Article of Association (“AoAs”), the SHAs are private agreements which are only applicable to the parties to the contract i.e. the shareholders of the company and the company itself. However, the SHAs are extra layer of protection for the shareholders in addition to statutory protections in case of disputes. However, the questions of arbitrability of SHA are based on two tests i.e. right in personam and right in rem, the test developed in the case of “Booz Allen & Hamilton Inc v SBI Home Finance and Ors”.[1] The former is arbitrable because the disputes involving right in personam affects the rights of parties who are party to such contact only.[2] While the later, being the right in rem cannot be arbitrated because it affects the public at large and cannot be adjudicated by such private arbitration.
As the disputes with respect to oppression and mismanagement of company comes under the jurisdiction, conferred by the companies act, 2013, of NCLT, a private clause in SHAs for the resolution of dispute has been matter of debate. Usually, the jurisdiction is conferred by the statutes and not by the private agreements entered into between the parties. Section 8 of the Arbitration and Conciliation Act, 1996 obliges the courts to refer the matters to the arbitration if there is arbitration clause in the agreements in dispute. However, certain disputes like winding up of company, divorce matters, insolvency proceeding cannot be referred for arbitration. In Rakesh Malhotra v. Rajinder Malhotra, the Bombay High Court held that the matter of oppression and mismanagement is not capable of adjudication by way of arbitration and it is the exclusive jurisdiction of the NCLT, the power conferred upon by the Companies Act, 2013.[3] The courts dealing with the petition of oppression and mismanagement have owned facts based approach to decide the arbitrability of the matter. The courts may refer the disputes arising out of agreement containing arbitration clause to arbitration if the relief sought is directly following from the terms of the agreement.[4] Moreover, it has been held that disputes pertaining to oppression and mismanagement are capable of being adjudicated by way of arbitration, provided that claim sought under section 241 and 242 of the act is inter-parties.[5]
In the case of Rakesh Malhotra, the Bombay High court has enunciated that oppression and mismanagement disputes entail the right in rem and even if it contains few right in personam and other right in rem the same cannot be severed so as to refer the dispute to arbitration.[6] In addition to it, such disputes are not amenable to arbitration given the nature of power conferred upon NCLT and relief it can provide under section 241 and 242 of the companies act, 2013.
However, it is worth mentioning herein that if the company petition is filed under section 241 and 242 with the dishonest intention to evade the arbitration clause then such petition can be dismissed.[7] In addition to it, the courts are of the view that such petition which is malafide, vexatious and dressed-up and the disputes are amenable to private arbitration then such petition is liable to be dismissed.
Conclusion
To sum up, the dispute arising out of SHA is arbitrable provided the disputes under 241 and 242 arise from the breach of shareholders’ agreement or joint venture agreements, provided relief is not being sought under these sections. It worth noting that the arbitrability of SHA dispute rests of upon the nature of rights being affected and the breach of shareholders agreement. Thus, such cases squarely fall under the ambit of section 8 and 45 of the Arbitration and Conciliation Act, 1996. It is pertinent to mention that damages being sought by way of arbitration upon the breach of shareholders agreement and another a relief is being sought under section 242 of companies act, 2013 for oppression and mismanagement of the company are viable simultaneously and such distinct relief and claim can be pursued separately without any prejudice to any law for the time being.[8]
Arbitration of shareholder’s dispute rather than litigating in the court of law augurs well for the rights and interest of shareholders and the company as well. Firstly, it is cost effective and saves the time of the both. Arbitration, with the help of experts chosen by them, would provide flexibility, while allowing them to keep their business relationships intact by allowing them with tailored solutions, which suits interest of the company and the shareholders. Lastly, it protects the sensitive confidential corporate information and the reputation of the company in the market thereby protecting the value of shareholders. However, disputes affecting the public at large are not amenable to dispute in the eyes of statute as well as that of court, as evident by the decisions in this regard. Thus, in SHAs disputes containing arbitration clause, the nature of rights infringed is the issue which has to be decided at the outset to make it amenable to arbitration.
References:
[1]Booz Allen & Hamilton Inc v SBI Home Finance and Ors. (2017) ibclaw.in 576 SC.
[2]HDFC Bank Ltd v Satpal Singh Bakshi (2017) ibclaw.in 155 HC.
[3]Rakesh Malhotra v. Rajinder Malhotra, MANU/MH/1309/2014.
[4] E Logistics v Financial Technologies, 2007 139 CompCas 311 CLB.
[5] Escorts Finance v G R Solvents, 1999 96 Comp Cas 323 CLB.
[6] Supra, Note 3.
[7] Aishwarya Singh, Arbitrability of Oppression and Mismanagement in India, INDIACORPLAW (June. 15, 2024), https://indiacorplaw.in/2017/08/arbitrability-oppression-mismanagement-india.html#_ftn13.
[8] Ibid.
