An arbitration agreement is governed by the same principles as of contract law, that if an arbitration agreement is entered into by one of the companies in a group, the same cannot be binding on the other companies of the same group, as each company is a separate legal entity. Therefore, the company of the group which entered into the Arbitration Agreement would alone be bound by it. The 'Group of Companies' Doctrine can only be invoked in a case where from the arbitration agreement it is evident that the parties had the intention to bind the arbitration agreement on both the signatory as well as the non-signatory.
Thus, the Courts and Tribunals, can invoke the 'Group of Companies' doctrine in the cases whereby the intention of the parties was clear from the Arbitration Agreement that the non-signatory company is a necessary party to the contract.
In 1992, MTNL floated 17% Non-Cumulative Secured Redeemable Bonds described as the VI Series (Private Placement) worth INR 425 crores. On 10th February 1992, MTNL placed bonds worth INR 200 crores with Can Bank Financial Services Ltd. (hereinafter referred to as "CANFINA") under an MoU agreement. The bond amount of INR 200 cores was placed as fixed deposit by MTNL with CANFINA. CANFINA paid back INR 50 crores of the fixed deposit in 1992. The balance fixed deposit amount of INR 150 crores along with interest was not paid by CANFINA to MTNL. As a consequence, MTNL did not service the interest on bonds. MTNL was of the view that since it did not receive the entire bond amount of INR 200 crores, the entire deal did not go through. Against payment of INR 50 crores received from CANFINA, MTNL serviced the bonds of approximately INR 31 crores to the public. MTNL was of the view that only a sum of INR 5.41 crores was payable to CANFINA, which was not accepted by CANFINA. As per Canara Bank, soon after the bonds were subscribed, there was an outbreak of a security scam which led to a collapse of the secondary market in shares, security and bonds. There were very few buyers in the secondary market. Even such buyers were offering very low prices for these bonds. In these circumstances, CANFINA was faced with a severe liquidity crunch.
In these circumstances, Respondent No. 1 – Canara Bank purchased the Bonds issued by MTNL, of the face value of INR 80 crores, from Respondent No. 2 – CANFINA which is its wholly owned subsidiary. Canara Bank requested for registration of these Bonds with MTNL, and lodged letters of allotment for purchase of the bonds from CANFINA. MTNL vide letter dated 14.10.1992 addressed to Canara Bank, refused to transfer the Bonds, on the various grounds mentioned in the letter.
MTNL by a subsequent letter dated 16th February 1993, informed Canara Bank that it had registered a part of the face value of INR 40 crores, in favour of CANFINA. The bond instruments were however retained on the ground that CANFINA had failed to pay the deposit money of INR 150 crores, which was payable to MTNL with an accrued interest of 12% p.a.
MTNL vide letter dated 20th October 1993, cancelled all the Bonds inter alia on the ground that letters of consideration remained with CANFINA. Canara Bank vide its reply dated 13th January 1994 contended that it is the holder in due course and is entitled to have the shares registered in its name, and receive the interest as and when it fell due.
MTNL sent a statement of accounts by adjusting the proceeds of the cancellation of bonds towards the dues of CANFINA. It was stated that the bonds and interest accrued thereon cannot be refunded. MTNL with its letter dated 13th January 1994, attached a cheque for INR 5,41,17,463 as the amount payable to Canara Bank. Canara Bank, however, returned the cheque vide letter dated 10th February 1994, demanding the restoration and registration of the bonds. Thereafter, disputes arose between the parties and only after the said issues reached before the Cabinet Secretary, an arbitration agreement came to be shared between the parties wherein Canara Bank and CANFINA were on one side, and MTNL on the other and accordingly, the Delhi High Court with the consent of parties, appointed a Sole Arbitrator to decide the issues between the parties. On 05th January 2012, the Sole Arbitrator issued notice to all the three parties i.e. MTNL, Canara Bank, and CANFINA.
Canara Bank raised an objection to joining CANFINA as a party to the arbitration. The Arbitrator heard the parties on the 27th March 2012 on the issue whether CANFINA should be joined as a party to the proceedings. The learned Arbitrator passed an interim award holding that CANFINA had not appeared on 16th September 2011 before the High Court, when the disputes were referred to arbitration. CANFINA was not a party to the arbitration agreement and cannot be joined as a party to proceedings.
MTNL filed Interim Applications before the Delhi High Court for recall of the orders dated 16.09.2011, 21.10.2011 and 05.07.2013 passed in W.P. (C) No. 560 of 1995 which came to be dismissed by the Delhi High Court. The said orders were challenged by MTNL before the Hon'ble Supreme Court.
The following issues arose for determination before the Hon'ble Supreme Court: i. The issue raised by MTNL with respect to the existence of a valid arbitration agreement between the three parties; ii. The issue has been raised by Canara Bank that the Order dated 16.09.2011 and 21.10.2011 is between Canara Bank and MTNL. Respondent No. 2 – CANFINA is not a party.
The Hon'ble Supreme Court partly allowed the Civil Appeals whereby the first issue came to be decided in the negative and the second issue was affirmed.
Findings of the Hon'ble Supreme Court
The Hon'ble Supreme Court while dealing with the first issue came to a finding that the agreement between the parties as recorded in a judicial order, is final and conclusive of the agreement entered into between the parties. MTNL, thus, after giving its consent to refer the disputes to arbitration before the Delhi High Court, is now estopped from contending that there was no written agreement to refer the parties to arbitration and further, the issue raised by is also devoid of any merit in view of the interpretation of Section 7(4)(c) of the Arbitration and Conciliation Act, 1996 as the statement of Claim and Defence filed before the Sole Arbitrator would constitute evidence of the existence of an arbitration agreement.
The Hon'ble Supreme Court while dealing with the second important issue as raised by Canara Bank came to a finding that the 'Group of Companies' Doctrine provides that a non-signatory may be bound by an arbitration agreement where the parent or holding company, or a member of the group of companies is a signatory to the arbitration agreement and the non-signatory entity on the group has been engaged in the negotiation or performance of the commercial contract, or made statements indicating its intention to be bound by the contract, the non-signatory will also be bound and benefitted by the relevant contracts.
The circumstances in which the 'Group of Companies' Doctrine could be invoked to bind the non-signatory affiliate of a parent company, or inclusion of a third party to an arbitration, if there is a direct relationship between the party which is a signatory to the arbitration agreement; direct commonality of the subject matter; the composite nature of the transaction between the parties. A 'composite transaction' refers to a transaction which is interlinked in nature; or, where the performance of the agreement may not be feasible without the aid, execution, and performance of the supplementary or the ancillary agreement, for achieving the common object, and collectively having a bearing on the dispute.
Furthermore, the Hon'ble Supreme Court came to a finding that It will be a futile effort to decide the disputes only between MTNL and Canara Bank, in the absence of CANFINA, since undisputedly, the original transaction emanated from a transaction between MTNL and CANFINA – the original purchaser of the Bonds. The disputes arose on the cancellation of the Bonds by MTNL on the ground that the entire consideration was not paid. Thus, there is a clear and direct nexus between the issuance of the Bonds, its subsequent transfer by CANFINA to Canara Bank, and the cancellation by MTNL, which has led to disputes between the three parties. Therefore, CANFINA is undoubtedly a necessary and proper party to the arbitration proceedings. The Hon'ble Supreme Court also was of the view that the present case is one of implied or tacit consent by Respondent No. 2 i.e. CANFINA to being impleaded in the arbitral proceedings, which is evident from the conduct of the parties and further, Respondent No. 2 – CANFINA has throughout participated in the proceedings before the Committee on Disputes, before the Delhi High Court, before the Sole Arbitrator, and was represented by its separate Counsel before the Hon'ble Supreme Court in the present Civil Appeals. Thus, there was a clear intention of the parties to bind both Canara Bank, and its subsidiary – CANFINA to the proceedings and therefore, in this case, there can be no final resolution of the disputes, unless all three parties are joined in the arbitration.
The judgment as passed by the Hon'ble Supreme Court on the concept of 'Group of Companies' doctrine is another step in right direction in order to ensure that there is no multiplicity of proceedings which often arises in domestic as well as international arbitrations.
Since the main object of the arbitral proceedings is to decide the disputes expeditiously and within a time frame, this object can be achieved only when the disputes are resolved as far as possible in one arbitral proceedings. In this case, this object can be achieved only when all the three parties are made party in one arbitral proceedings to enable the arbitral tribunal to finally decide the dispute on merits in accordance with law.
Published in September 2019
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