The ever non-quenchable thirst for foreign investment on our part and the ever non-diminishing power hunger on the part of foreign investors culminating in different form of Joint Venture Agreement (JVA), Share Purchase Agreement (SPA) and Share Holders Agreement (SHA) result in inserting an omnibus arbitration clause to settle disputes that arise from these agreements. In most of the cases the terms and conditions of these agreements are incorporated in the articles of association of the company also. Some times the arbitration clause is also incorporated in the articles by way of a separate arbitration clause.
Quite often the arbitration clause is pressed in aid as a defense strategy against an action of oppression and mismanagement brought against the company and indulging shareholders before the Company Law Board. In a string of decisions the CLB had formulated a legal principle to determine what are arbitrable disputes that lie before an arbitrator and non-arbitrable disputes that lie only before it. This article examines the ‘arbitrability rationale’ of the CLB.
2. Relevant law points
Arbitration clause in articles
As per section 36 of the Companies Act, 1956 (the Act) articles of association (the AoA) of a company, when registered, bind the company and the members thereof to the same extent as if it had been signed by the company and by each member. Thus, the AoA is a contract entered into between each member and the company respectively. Further, AoA being a constituent document it binds the company and its directors as well1. Since AoA is a contract, an arbitration clause incorporated in it partakes the nature of an arbitration agreement between the members and the company.
Arbitration clause in contract
JVA, SPA and SHA are contracts between the executing parties. An arbitration clause appearing in these contracts is also an arbitration agreement between such parties to the contract. It is pertinent to note here that these contracts generally do not bind the company unless it is also a party to such contract. The very question whether a company could be a party to such contracts is a debatable issue to which this article does not address.
Effect of contractual clauses on the company
Provisions contained in JVA, SPA and SHA do not bind a company if they are not made part of the AoA of the company2. Either each and every clause of the contract could be incorporated in the AoA or by way of a reference to such contracts in the AoA.
The nature of disputes arising out of JVA, SPA and SHA or like instruments mainly confines to the management functions and control of the company where invariably the aggrieved person /group alleges non-compliance of the terms of the agreements and / or AoA. The allegations generally take any of the following contours:
- Non-appointment of directors nominated by the other group or person.
- Manner of utilization of funds.
- Deadlock in meetings.
- Non-supplying of minutes and or/financial information required by the other group or person.
- Implementation of projects without the consent of the other group.
- Implementing project that is rejected by the other group.
- Not sending the notice of meeting, non-provision of agenda of the meeting etc.
- Effecting changes in the shareholding pattern in detriment to the other person or group.
- Violating the provisions of the articles of association.
4. Arbitrability of disputes
Section 8 of the Arbitration and Conciliation Act, 1996 requires any judicial authority to refer the matter before it for arbitration where arbitration is provided for resolving the disputes in the contract entered into by the parties. Since this is a mandatory provision the core issue is whether all disputes arising out of JVA, SPA, SHA, AoA should be adjudicated by the process of arbitration alone or could they be decided by any other Court or Tribunal. In this regard, it is worth mentioning the rationale adopted by the Supreme Court3 that the dispute should be the subject of arbitration agreement, so that it could be referred to arbitration. The term ‘subject to arbitration agreement’ means the authority of the arbitrators to decide the dispute or in other words the dispute should be of arbitrable nature. If the dispute is not subject to arbitration agreement i.e. not arbitrable, then it cannot be referred to arbitration.
5. Disputes before CLB
The Act provides for the CLB to decide the issues relating to oppression and suppression of minority by majority and vice versa, mismanagement of the finances and affairs of the company, non-registration of share transfers, rectification of members register etc. In other words, CLB is the statutory forum established to adjudicate and determine all issues arising out of the Act and pertaining to its jurisdiction.
Quite often, in a petition under section 397 and 398, the respondents makes a claim that the disputes alleged in the petition are subject matter of arbitration contained in the agreements and/or the AoA of the company and therefore they should be referred to arbitration as CLB has no jurisdiction to adjudicate.
6. CLB’s approach
The CLB looks into the disputes raised and allegations made in the petition to ascertain whether the allegations relate to the violation of the contractual terms of the contract or any violation of the provisions of the Act and /or the AoA of the company.
If the allegations pertain to the violation of the Statue or AoA or in relation to the rights of the oppressed person in his capacity as a member of the company, then it refuses to refer the parties to arbitration4. More so, in a petition where allegations pertain to oppression and mismanagement such dispute cannot be referred to arbitration5. The CLB refused to refer the parties to arbitration in Gautam Kapur v. Limrose Engineering6 and Lammertz Industriadel GmbH v. Altek Lammertz Needles Ltd 7 on the above reasoning.
The rationale of the CLB is legally sound because the Companies Act, 1956 is a special Act compared with the Arbitration and Conciliation Act, 1996 where the latter Act is general as far as arbitration is concerned and the former is special as far as violations of its provisions are concerned. Since the CLB is a special Tribunal specifically established to deal with and adjudicate on issues resulting in violations of the Act the provisions of arbitration would have no application to determine such issues. Further, when the acts of the oppressor infringe the rights of the oppressed such infringement or violations cannot be adjudicated through the process of arbitration because violation of statutory rights is not the subject of arbitration agreement. For example, disputes relating to the statutory rights under the Rent control Act, Sucession Act, Debt Recovery Act etc., cannot be adjudicated by arbitration but only by the special judicial authority prescribed under the statutes. In other words, disputes arising out of violation of statutory rights and duties are not arbitrable disputes.
7. Exception to the rationale
There seems to be an exception to this rationale. In order to make a complaint to CLB under section 397 and /or 398, the applicant should satisfy the conditions laid down in section 399 of the Act. Suppose if an applicant is not able to satisfy the condition, say he holds less than 10% of the total voting power and is being oppressed by the majority where will he go? If the AoA contains arbitration clause or if the contract, if any, contains arbitration clause, then he can resort to the remedy of arbitration. The reason is that in such cases the CLB has no jurisdiction to adjudicate because of the ineligibility of the applicant to approach it. However, such a situation could be a rarity.
1 Dale & Carrington Invt. (P) Ltd v.P.K.Prathapan, JT 2004 (7) SC 434.
2 Rangaraj v. Gopalakrishnan, AIR 1992 SC 453.
3 Haryana Telecom Ltd v.Sterlite Industries (India) Ltd, (1999) 5 SCC 688. In this case the Supreme Court refused to refer the winding up petition, based on inability to pay debt, to arbitration on the ground that winding up of a company is not the subject of arbitration agreement.
4 Griesheim GmbH v. Goyal MG Gases Pvt Ltd, (2004) 62 CLA _____(CLB-Del)
5 Sudershan Chopra v. CLB, (2004) 64 CLA 214 (P&H).
6 Order of CLB in C.P.No.18 of 2002.
7 Order of CLB-Chennai in C.A. No.21 of 2004 in C.P.No.3 of 2004.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.