Op EdsOP. ED.

Oppression and mismanagement

Time and again there have been discussions on whether petitions filed for reliefs sought under Sections 241[1] and 242[2] of the Companies Act, 2013 (CA, 2013), corresponding to Sections 397[3] and 398[4] of the Companies Act, 1956 (CA, 1956), could be referred to arbitration in case if there was an arbitration agreement between the parties to such petition. The Supreme Court of India, coming to the rescue as always, has presented us with an infallible test for resolving this issue, enabling the courts and tribunals make swift decisions in such matters.

Test

The paroxysm of decisions commenced post the Delhi High Court’s decision in Kare (P) Ltd., In re[5] where the Delhi High Court observed that the jurisdiction of the Company Law Board (CLB) under Sections 397 and 398 of the CA, 1956 is a statutory jurisdiction that cannot be ousted by arbitration clause.

In 1999, the Supreme Court was presented with a petition [Haryana Telecom Ltd. v. Sterlite Industires (I) Ltd.6] where the appellant had challenged a decision by the Punjab and Haryana High Court rejecting an application filed by the appellant, under Section 8 of the Arbitration and Conciliation Act, 19967 (ACA) for referring a winding-up petition to arbitration. The Punjab and Haryana High Court had reasoned this decision by stating that matters under the CA, 19568 for such reliefs were not arbitrable. The Supreme Court while rejecting the appeal, opined that Section 8 of the ACA postulates that what can be referred to the arbitrator is only that dispute or matter which the arbitrator is competent or empowered to decide. The Supreme Court further opined that the power to order winding up of a company is contained under the CA, 1956 and is conferred on the court, as such an arbitrator, notwithstanding any agreement between the parties, would have no jurisdiction to order winding up of a company.

The Supreme Court in Sumitomo Corpn. v. CDC Financial Services (Mauritius) Ltd.9 upheld the order of the CLB rejecting a reference to international arbitration under Section 4510 of the ACA stating that the subject-matter of the petition under Sections 397 and 398 before the CLB was pertaining to the affairs of the company and not covered under the arbitration agreement.

Probably picking up this trail of thought, in 2011, the Supreme Court, in Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd.11, set out further clarification and test to examine arbitrability of a dispute. The Supreme Court simplified the test stating that generally and traditionally all disputes relating to right in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. A right in rem is a right exercisable against the world at large, as contrasted from a right in personam which is an interest protected solely against specific individuals. In this manner, Booz Allen12 judgment crystallised an apparatus to test whether a dispute should or ought to not be referred to arbitration. The Supreme Court, however, has clarified that this is not a rigid or inflexible rule.

The Supreme Court has also confirmed in its decision in Aruna Oswal v. Pankaj Oswal13 that jurisdiction of National Company Law Tribunal (NCLT) in respect of oppression and mismanagement, does not extend to determination of disputes as to succession or ownership of shares, proper forum for which is civil court and that jurisdiction under Sections 241 to 244 must be exercised strictly in terms of provisions of CA, 201314. This makes it clear that disputes regarding succession and ownership of shares, which could be considered as rights in personam, do not fall within the ambit of the jurisdiction of the NCLT.

Now this could have led to an interpretation that the reliefs in personam could be carved out of reliefs in rem and referred to arbitration. However, the Supreme Court in Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya15 the Supreme Court observed that there is no provision in the ACA that when the subject-matter of the suit includes subject-matter of the arbitration agreement as well as other disputes, the matter is required to be referred to arbitration. The Supreme Court further held that: (a) if bifurcation of the subject-matter of a suit was contemplated, the legislature would have used appropriate language to permit such a course; and (b) since there is no such indication in the language, it follows that bifurcation of the subject-matter of an action brought before a judicial authority is not allowed.

Argument

Going by the reasoning provided by the Supreme Court in Haryana Telecom16 judgment and Booz Allen17 judgment it could be argued that in the event a court or a tribunal has been specifically bestowed with the power to decide any disputes or matters falling under the CA, 1956 and CA, 201318, such disputes or matters ought to be decided by the court so authorised even if there is an arbitration agreement between parties to such dispute. This would evidently render such disputes non-arbitrable.

To continue this line of argument and its application to petitions filed against oppression and mismanagement, it could be noted that Section 242 of the CA, 2013 (corresponding Section 397 of the CA, 1956) bestows a unique observational power upon the NCLT being the Tribunal appointed under the CA, 2013. This section empowers the NCLT to pass any order that it deems fit if, in its opinion, the company’s affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members or prejudicial to public interest or in a manner prejudicial to the interests of the company and it would unfairly prejudice a petitioning member or members to wind up the company, but otherwise the facts justify that it was just and equitable that the company should be wound up. Section 244 of the CA, 2013, also specifies reliefs that the NCLT has the power to be provided in such circumstances.

In view of the Haryana Telecom19 judgment, the Booz Allen20 judgment and the sections mentioned above governing oppression and mismanagement petitions, the following is discernible:

(a) the right provided under these sections are a right in rem;

(b) the NCLT has the exclusive jurisdiction for entertaining petitions seeking reliefs under these sections;

(c) such disputes are non-arbitrable and as such cannot be referred to arbitration; and

(d) bifurcation of the subject-matter of an action brought before a judicial authority is not allowed.

Reiteration

This interpretation has been affirmed and asserted in the landmark judgment of the Bombay High Court in Rakesh Malhotra v. Rajinder Kumar Malhotra21 where the Bombay High Court held that: (a) a petition that is merely “dressed up” and seeks, in the guise of an oppression and mismanagement petition, to oust an arbitration clause, or a petition that is itself vexatious, oppressive, mala fide (or, at any rate, not bona fide) cannot be permitted to succeed; (b) in assessing an allegation of “dressing up”, the Sections 397/398 petition must be read as a whole, including its grounds and the reliefs sought; (c) it cannot be carved up and deconstructed so as to bring some matters within the arbitration clause and leave other matters out; and (d) where there are reliefs that are not arbitrable because they fall within Section 402 of the CA, 195622, there is no question of a dismissal of the petition on the ground that there exists an arbitration clause.

The Bombay High Court at Goa, while following this principle in Emgee Housing (P) Ltd. v. ELS Developers (P) Ltd.23 held that even if, there is an arbitration agreement between the parties and even if, the dispute is covered by the arbitration agreement, the court/judicial authority will refuse the application under Section 8 of the ACA, if the subject-matter of the dispute is capable of adjudication only by a public forum.

The National Company Law Appellate Tribunal has also supported this stand in Dhananjay Mishra v. Dynatron Services (P) Ltd.24 and held that on a plain reading of Section 242 of the CA, 2013, it is manifestly clear that the facts should justify the making of a winding-up order on just and equitable grounds and admittedly, arbitrator would have no jurisdiction to pass a winding-up order on the ground that it is just and equitable which falls within the exclusive domain of the NCLT under Section 271(e) of the CA, 201325.

Denouement

It can be seen from the plethora of decisions mentioned above, that the evident takeaway and the solidified legal position as regards this issue is that reliefs against oppression and mismanagement sought under Sections 241 and 242 of the CA, 2013 cannot be referred to arbitration even if there is an existing arbitration agreement between the parties to such dispute. However, as always, legal positions are not set in stone and are subject to changes pursuant to judicial or legislative overrule.


Partner, Litigation and Dispute Resolution, ANB Legal

[1] <http://www.scconline.com/DocumentLink/6HABUR84>.

[2] <http://www.scconline.com/DocumentLink/ngwj7o9Y>.

[3] <http://www.scconline.com/DocumentLink/0j1F4Or0>.

[4] <http://www.scconline.com/DocumentLink/yv3H0ZZU>.

[5] 1974 SCC OnLine Del 101.

6 (1999) 5 SCC 688.

7 <http://www.scconline.com/DocumentLink/0P4pSy8x>.

8 <http://www.scconline.com/DocumentLink/pm3Rt2A0>.

9 (2008) 4 SCC 91.

10 <http://www.scconline.com/DocumentLink/7vabSnZy>.

11 (2011) 5 SCC 532.

12 (2011) 5 SCC 532.

13 (2020) 8 SCC 79.

14 <http://www.scconline.com/DocumentLink/Mv13z5zB> <http://www.scconline.com/DocumentLink/qZ3RzV2v>.

15 (2003) 5 SCC 531.

16 (1999) 5 SCC 688.

17 (2011) 5 SCC 532.

18 <http://www.scconline.com/DocumentLink/A5aqjfDv>.

19 (1999) 5 SCC 688.

20 (2011) 5 SCC 532.

21 2014 SCC OnLine Bom 1146 : (2015) 192 Comp Cas 516.

22 <http://www.scconline.com/DocumentLink/YK8772ux>.

23 2016 SCC OnLine Bom 2391.

24 2019 SCC OnLine NCLAT 163.

25 <http://www.scconline.com/DocumentLink/GxMubOA7>.

Case BriefsSupreme Court

Supreme Court: Three days after the Court overruled the ratio in Himangni Enterprises v. Kamaljeet Singh Ahluwalia, (2017) 10 SCC 706 wherein it was held that landlord-tenant disputes governed by the provisions of the Transfer of Property Act, 1882, are not arbitrable as this would be contrary to public policy, the 3-judge bench of SA Bobde, CJ and AS Bopanna* and V. Ramasubramanian, JJ referred to the law laid down in Vidya Drolia v. Durga Trading Corporation2020 SCC OnLine SC 1018 and explained what makes the lease disputes arising under the Transfer of Property Act, 1882 arbitrable and those under Rent Acts, non-arbitrable.

Here’s the explainer by the Court:

Disputes arising under Transfer of Property Act

Section 111, 114 and 114A of the TP Act indicate the manner in which the determination of lease would occur, which also includes determination by forfeiture due to the acts of the lessee/tenant in breaking the express condition   agreed between the parties or provided in law. The breach and the consequent forfeiture could also be with respect to nonpayment of rent.

In such circumstance where the lease is determined by forfeiture and the lessor sues to eject the lessee and, if, at the hearing of the suit, the lessee pays or tenders to the lessor the rent in arrear, Section 114 of TP Act provides that the Court instead of passing a decree for ejectment may pass an order relieving the lessee against the forfeiture due to which the lessee will be entitled to hold the property leased as if the forfeiture had not occurred.

Under Section 114A of the TP Act a condition for issue of notice prior to filing suit of ejectment is provided so as to enable the lessee to remedy the breach.

“No doubt the said provisions provide certain protection to the lessee/tenant before being ejected from the leased property. In our considered view, the same cannot be construed as a statutory protection nor as a hard and fast rule in all cases to waive the forfeiture. It is a provision enabling exercise of equitable jurisdiction in appropriate cases as a matter of discretion.”

Such equitable protection does not mean that the disputes relating to those aspects between the landlord and the tenant is not arbitrable and that only a Court is empowered to waive the forfeiture or not in the circumstance stated in the provision.

When the disputes arise between the landlord and tenant with regard to determination of lease under the TP Act, the landlord to secure possession of the leased property in a normal circumstance is required to institute a suit in the Court which has jurisdiction. However, if the parties in the contract of lease or in such other manner have agreed upon the alternate mode of dispute resolution through arbitration the landlord would be entitled to invoke the arbitration clause and make a claim before the Arbitrator.

Even in such proceedings, if the circumstances as contained in Section 114 and 114A of TP Act arise, it could be brought up before the Arbitrator who would take note of the same and act in accordance with the law qua passing the award.

“If in the arbitration proceedings the landlord has sought for an award of ejectment on the ground that the lease has been forfeited since the tenant has failed to pay the rent and breached the express condition for payment of rent or such other breach and in such proceedings the tenant pays or tenders the rent to the lessor or remedies such other breach, it would be open for the Arbitrator to take note of Section 114, 114A of TP Act and pass appropriate award in the nature as a Court would have considered that aspect while exercising the discretion.”

Disputes arising under Rent Acts

The disputes arising under the Rent Acts are not arbitrable as notwithstanding the terms and conditions entered into between the landlord and tenant to regulate the tenancy, if the eviction or tenancy is governed by a special statute, namely, the Rent Act the premises being amenable to the provisions of the Act would also provide statutory protection against eviction and the courts specified in the Act alone will be conferred jurisdiction to order eviction or to resolve such other disputes.

“In such proceedings under special statutes the issue to be considered by the jurisdictional court is not merely the terms and conditions entered into between the landlord and tenant but also other aspects such as the bonafide requirement, comparative hardship etc. even if the case for eviction is made out.”

In such circumstance, the Court having jurisdiction alone can advert into all these aspects as a statutory requirement and, therefore, such cases are not arbitrable. The same is not the position in matters relating to the lease/tenancy which are not governed under the special statutes but under the TP Act.

Conclusion

Insofar as eviction or tenancy relating to matters governed by special statutes where the tenant enjoys statutory protection against eviction whereunder the Court/Forum is specified and conferred jurisdiction under the statute alone can adjudicate such matters. Hence in such cases the dispute is non-arbitrable.

If the special statutes do not apply to the premises/property and the lease/tenancy created thereunder as on the date when the cause of action arises to seek for eviction or such other relief and in such transaction if the parties are governed by an Arbitration Clause; the dispute between the   parties is arbitrable and there shall be no impediment whatsoever to invoke the Arbitration Clause.

[Suresh Shah v. Hipad Technology Pvt. Ltd., 2020 SCC OnLine SC 1038, decided on 18.12.2020]


*Justice AS Bopanna has penned this judgment

For petitioner: Advocate Vikas Dhawan

Also read: ‘Landlord-tenant disputes under Transfer of Property Act are arbitrable’. SC lays down test for determining non-arbitrability of disputes

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of NV Ramana*, Sanjiv Khanna** and Krishna Murari, JJ has overruled the ratio in Himangni Enterprises v. Kamaljeet Singh Ahluwalia, (2017) 10 SCC 706 wherein it was held that landlord-tenant disputes governed by the provisions of the Transfer of Property Act, 1882, are not arbitrable as this would be contrary to public policy.

Are Landlord-tenant disputes arbitrable?

“Landlord-tenant disputes are arbitrable as the Transfer of Property Act does not forbid or foreclose arbitration. However, landlord-tenant disputes covered and governed by rent control legislation would not be arbitrable when specific court or forum has been given exclusive jurisdiction to apply and decide special rights and obligations. Such rights and obligations can only be adjudicated and enforced by the specified court/forum, and not through arbitration.”

  • Landlord-tenant disputes are not actions in rem but pertain to subordinate rights in personam that arise from rights in rem. Such actions normally would not affect third-party rights or have erga omnes affect or require centralized adjudication.
  • An award passed deciding landlord-tenant disputes can be executed and enforced like a decree of the civil court.
  • Landlord-tenant disputes do not relate to inalienable and sovereign functions of the State. The provisions of the Transfer of Property Act do not expressly or by necessary implication bar arbitration.
  • Transfer of Property Act, like all other Acts, has a public purpose, that is, to regulate landlord-tenant relationships and the arbitrator would be bound by the provisions, including provisions which enure and protect the tenants.

A fourfold test for determining non-arbitrability of a dispute

(1) when cause of action and subject matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem.

(2) when cause of action and subject matter of the dispute affects third party rights; have erga omnes effect; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable;

(3) when cause of action and subject matter of the dispute relates to inalienable sovereign and public interest functions of the State and hence mutual adjudication would be unenforceable; and

(4) when the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).

However, these tests are not watertight compartments; they dovetail and overlap, albeit when applied holistically and pragmatically will help and assist in determining and ascertaining with great degree of certainty when as per law in India, a dispute or subject matter is non-arbitrable. Only when the answer is affirmative that the subject matter of the dispute would be non-arbitrable.

Instances of Non-arbitrable disputes

  • Insolvency or intracompany disputes
  • Grant and issue of patents and registration of trademarks
  • Criminal cases
  • Matrimonial disputes relating to the dissolution of marriage, restitution of conjugal rights etc.
  • Probate, testamentary matter etc.
  • Allegations of fraud can be made a subject matter of arbitration when they relate to a civil dispute. This is subject to the caveat that fraud, which would vitiate and invalidate the arbitration clause, is an aspect relating to non-arbitrability.
  • Disputes which are to be adjudicated by the DRT under the DRT Act.

When can the issue of non-arbitrability be raised?

  1. Before the court on an application for reference under Section 11 or for stay of pending judicial proceedings and reference under Section 8 of the Arbitration Act;
  2. Before the arbitral tribunal during the course of the arbitration proceedings; or
  3. Before the court at the stage of the challenge to the award or its enforcement.

‘Existence of an arbitration agreement’ – Meaning

“An agreement evidenced in writing has no meaning unless the parties can be compelled to adhere and abide by the terms. A party cannot sue and claim rights based on an unenforceable document. Thus, there are good reasons to hold that an arbitration agreement exists only when it is valid and legal. A void and unenforceable understanding is no agreement to do anything. Existence of an arbitration agreement means an arbitration agreement that meets and satisfies the statutory requirements of both the Arbitration Act and the Contract Act and when it is enforceable in law.”

Hence, the phrase ‘existence of an arbitration agreement’ in Section 11 of the of the Arbitration and Conciliation Act, 1996, would include aspect of validity of an arbitration agreement, albeit the court at the referral stage would apply the prima facie test. In cases of debatable and disputable facts, and good reasonable arguable case, etc., the court would force the parties to abide by the arbitration agreement as the arbitral tribunal has primary jurisdiction and authority to decide the disputes including the question of jurisdiction and non-arbitrability.

Who decides arbitrability?

The general rule and principle, in view of the legislative mandate clear from the amendments to the of the Arbitration and Conciliation Act, 1996 by Act 3 of 2016 and Act 33 of 2019, and the principle of severability and competence-competence, is that the arbitral tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The court has been conferred power of “second look” on aspects of nonarbitrability post the award in terms of sub-clauses (i), (ii) or (iv) of Section 34(2)(a) or sub-clause (i) of Section 34(2)(b) of the Arbitration Act.

Judicial Review- Scope

Scope of judicial review and jurisdiction of the court under Section 8 and 11 of the Arbitration Act is identical but extremely limited and restricted in order to check and protect parties from being forced to arbitrate when the matter is demonstrably ‘non-arbitrable’ and to cut off the deadwood.

Rarely as a demurrer the court may interfere at the Section 8 or 11 stage when it is manifestly and ex facie certain that the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable, though the nature and facet of non-arbitrability would, to some extent, determine the level and nature of judicial scrutiny.

The court by default would refer the matter when

  • contentions relating to non-arbitrability are plainly arguable;
  • consideration in summary proceedings would be insufficient and inconclusive;
  • facts are contested;
  • the party opposing arbitration adopts delaying tactics or impairs conduct of arbitration proceedings.

“This is not the stage for the court to enter into a mini trial or elaborate review so as to usurp the jurisdiction of the arbitral tribunal but to affirm and uphold integrity and efficacy of arbitration as an alternative dispute resolution mechanism.”

Justice NV Ramana, writing a separate but concurring opinion said

“Courts, while analyzing a case under Section 8, may choose to identify the issues which require adjudication pertaining to the validity of the arbitration agreement. If the Court cannot rule on the invalidity of the arbitration agreement on a prima facie basis, then the Court should stop any further analysis and simply refer all the issues to arbitration to be settled.”

He further states that the scope of the Court to examine the prima facie validity of an arbitration agreement includes only:

  1. Whether the arbitration agreement was in writing?
  2. Whether the arbitration agreement was contained in exchange of letters, telecommunication etc?
  3. Whether the core contractual ingredients qua the arbitration agreement were fulfilled?
  4. On rare occasions, whether the subject-matter of dispute is arbitrable?

[Vidya Drolia v. Durga Trading Corporation, 2020 SCC OnLine SC 1018, decided on 14.12.2020]


*Justice NV Ramana penned a concurring opinion.

**Justice Sanjiv Khanna penned the judgment. 

For petitioners: Senior Counsels K. V. Vishwanathan, Manoj Swarup, Gopal Shankarnarayan

For Respondents: Senior Counsel Nakul Dewan and counsel Sourav Agarwal