BACKGROUND
Section 241 and 242 of the Companies Act, 2013 [hereinafter, 2013 Act] provide NCLT with the power to deal with the petitions which are related to Oppression and Mismanagement. Section 241 provides for the application to the tribunal for relief in the case of Oppression and Section 242 provides for the powers of the tribunals in such cases. The 2013 Act provides NCLT with a wide range of powers in relation to the issues dealing with Oppression and Mismanagement, however, none of the provisions specifically oust the jurisdiction of Arbitral Tribunal for adjudicating such issues per se.
Time and again there have been deliberations on whether petitions filed for reliefs sought under Sections 241 and 242 of the 2013 Act that are corresponding to Sections 397 and 398 of the Companies Act, 1956 [hereinafter, 1956 Act], could be referred to arbitration in case there is an arbitration agreement between the parties to such petition. The most common result for such discussion could be that the disputes concerning the Oppression and Mismanagement could not be said to be arbitrable. Further, this issue becomes complex by the very fact that the NCLT has been conferred jurisdiction by Section 241 and 242 of the 2013 Act to give decisions in relation to disputes arising out of Oppression and Mismanagement. If we see the interpretation of the same, one could say that since the jurisdiction to decide upon Oppression and Mismanagement disputes is conferred upon the NCLT, this automatically banishes the jurisdiction of the private arbitral tribunal to deal with the same. Hence this discussion gets complex every time and has thus resulted in an abundance of jurisprudence in this area.
ARBITRABILITY OF OPPRESSION AND MISMANAGEMENT- A DEBATED FIASCO
If we take into consideration the 1956 Act, the power to decide upon the Oppression and Mismanagement disputes was exercised by the Company Law Board and now National Company Law Tribunal is responsible for exercising the powers of passing the decision for disputes of the Oppression and Mismanagement.
Nowhere in the provisions of the Companies Act, 2013 has it been mentioned that arbitration is barred under such matters. Hence, if an agreement contains a clause of arbitration mutually agreed upon by the parties, then even under cases of oppression and mismanagement, prima facie it looks possible for the parties to go for arbitration under such matters.
For this, a composite reading of section 244 of the 2013 Act along with Sections 8 and Section 45 of the Arbitration and Conciliation Act, 1996 [hereinafter, Act, 1996] is required. Section 8 of the Act, 1996 states that when an action brought before the judicial authority is the subject matter of the arbitration, the authority must refer the parties to arbitration.
One of the earlier decisions in this regard was the case of Haryana Telecom Ltd. vs. Sterlite Industries Ltd1 where the Punjab and Haryana High Court rejected the application filed by the appellant under Section 8 of the Act, 1996 inter alia for referring a winding-up petition to the forum of arbitration. The reasons cited by the court were that the matters under the Companies Act for such relief cannot be arbitrable. The Supreme Court while dismissing the appeal, pronounced that Section 8 of the 1956 Act proposes that the dispute which 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 pronounced that the power to order winding up of a company is confined under the 1956 Act and is convened on the court and as such an arbitrator, regardless of any agreement between the parties, does not hold jurisdiction to order winding up of a company. Another landmark judgement in this relation is the case of Rakesh Malhotra vs. Rajvinder Malhotra2, where the court laid down that when wide and special powers have been given to the CLB under the then 1956 Act, the disputes are not capable of being referred to the arbitration. However, this rule is not without exceptions. One of the significant cases in this regard is the case of Ayyasamy v. Paramasivam and Ors.3, which holds:
"The 1996 Act does not in precise terms exclude any class of disputes whether they are civil or commercial – from arbitrability. Intrinsic legislative material is in fact to the contrary. Section 8 contains a mandate that where an action is brought before a judicial authority in a matter which is the subject of an arbitration agreement, parties shall be referred by it to arbitration, if a party to or a person claiming through a party to the arbitration agreement applies not later than the date of submitting the first statement on the substance of the dispute. The only exception is where the authority finds prima facie that there is no valid arbitration agreement."
Further, the court in the case of Rakesh Malhotra4 has also pointed out that by mere clever drafting of the petition, the nature of the suit cannot be changed before the court and that while determining the nature of the suit, the court has the duty to look at the real substance and legal ingenuity in the drafting of the plaint. If the court chooses to look at the basis of the power that can be used by the arbitrator, then it might lead to parties exploiting this procedure by clever drafting of the petition to escape arbitration. For this, the court pointed out-
"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. In assessing an allegation of 'dressing up', the Section 397 and 398 of the Companies Act, 1956 petition must be read as a whole, including its grounds and the reliefs sought."
BOOZ ALLEN ERA
The Booz Allen Case5 clarifies the law surrounding "arbitrability" further. It holds that where arbitrability is to be assessed in the context of Section 8 application in a pending suit, it is the court that is seized of the suit that has to decide all aspects of the arbitrability and the decision cannot be left to the arbitrator. Hence, even if there is an arbitration agreement between the parties and, even if the dispute is covered by the said arbitration agreement, the court shall refuse the application under Section 8 to refer the parties to arbitration, where the subject matter of the dispute is capable of adjudication only by a public forum or the relief claimed can only be granted by a special court or tribunal.
In this regard, the Booz Allen case has determined that there are three facets of arbitrability, relating to the jurisdiction of the arbitral tribunal
- 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?
It is a well-settled principle that an arbitration agreement is an independent or "self-contained" agreement that governs only the way of settling the disputes between the parties.6 Hence, the scope of inquiry is confined to the question that whether the arbitration agreement is "null and void, inoperative or incapable of being performed" but not the legality and validity of the substantive contract.
Hence, even where the substantive contract may be hit for being contrary to public policy, it does not ipso facto invalidate the arbitration agreement. The scheme of Section 8 would show that the use of the words "shall" and "refer the parties to arbitration" makes it legally obligatory on the court to refer the parties to arbitration once prima facie it is established that the arbitration agreement in question is neither null and void nor inoperable or incapable of being performed.7
Hence, where the rights arose out of an agreement [such as the Shareholders' Agreement, Share Purchase Agreement, and the Share Subscription Agreement], it has been held that the issues raised therein are to be referred to arbitration, as per the arbitration clause contained in the said agreements. Further, where a plea under Section 241 and 242 of the 2013 Act was raised regarding the managerial decisions amounting to oppression and mismanagement, it was seen that the petitioners were a party to all the decisions made, and hence, the petitioners were not entitled to raise the issues by way of petition under Section 241 and 242 of the 2013 Act.8
Again, where the main dispute is about the affirmative voting right and amendment of an article of the Article of Association which has been incorporated as per the Shareholders' Agreement that provides for arbitration as dispute resolution mechanism, it cannot be held that by filing a petition under Section 241 and 242 of the 2013 Act, the dispute will come within the exclusive jurisdiction of NCLT. This rationale is further applicable where the right in question is not a right in rem, but a right that will affect only the concerned parties who are parties to the agreement.9
CONCLUSION
Therefore, it can be concluded that the judicial authority shall not mechanically reject a Section 8 application where the plea of oppression and mismanagement under Section 241 and 242 is made. The judicial authority is bound to assess if there is a prima facie case made out establishing oppression and mismanagement.
Further, even where a case of oppression and mismanagement is made out, it is necessary for the court to assess if such oppression and mismanagement affect the right in rem or whether the rights affected, for which remedy is claimed, are rights of only the concerned parties that are parties to the agreement [rights in personam]. Where the rights affected are rights in personam, the dispute is arbitrable and judicial authority is bound to refer the dispute to arbitration.
Footnotes
1. Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd, (1999) 5 SCC 688.
2. Rakesh Malhotra v. Rajinder Malhotra, (2015) 2 CompLJ 288 (Bom).
3. Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386.
4. Supra Note 2.
5. Booz Allen and Hamilton Inc v. SBI Home Finance Ltd., (2011) 5 SCC 532.
6. Sasan Power Limited v. North American Coal Corporation India Private Limited, AIR 2016 SC 3974.
7. Hindustan Petroleum Corpn. Ltd. Vs. Pinkcity Midway Petroleums, AIR 2003 SC 2881.
8. Order dated 05.09.2018, in M/s KIMS Bellrose Institute of Medical Sciences Private Limited v. Jubey M. Devasia and Ors., IA No. 193 of 2018 in CP No. 14/2018 before the Division Bench, NCLT, Chennai.
9. Rishima SA Investments LLC V. Srishti Infrastructure Development Corporation Limited IA No. 181/KB/2017 arising out of CP No. 149/KB/2017.
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