Arbitrability of Oppression and Mismanagement Disputes: An Analysis

Introduction

The Companies Act, 2013 – a successor to the Companies Act, 1956 aims at regulating the formulation and functioning of companies in India and to be a listed company, a company must be incorporated under this Act in India. Although the term ‘oppression’ has not been defined under the Companies Act, 2013, in Rajahmundry Electric Company v. Nageshwara Rao[2] the Supreme Court defined it as ‘lack of probity and fair dealing in the affairs of the company to the prejudice of some portion of its members.’ In V.S. Krishnan v. Westford Hi-tech Hospital ltd[3], the Supreme Court set some parameters to demarcate the scope of oppression:

1. Where the act is wrong, harsh, or burdensome
2. Where the act benefits some shareholders and even in the interest of the company, but the conduct is mala fide.
3. The act is against good conduct.
4. If an act is found to be oppressive, the remedy to put an end to it is very wide.[4]

‘Mismanagement’ can be defined as conducting the company in a manner that is incompetent, dishonest and inept. It can also mean improper or non-maintenance of records that has to be done mandatorily, dealing in a manner that is not in accordance with corporate transparency and basically running the company in a way that is ultimately unprofitable to all the stakeholders.    Section 241(1) of the Companies Act, 2013 provides,

Any member of a company who complains that

 (a) the affairs of the company have been or are being conducted in a manner prejudicial to the public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company; or

 (b) the material change, not being a change brought about by, or in the interests of, any creditors, including debenture holders or any class of shareholders of the company, has taken place in the management or control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the company’s shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members, may apply to the Tribunal, provided such member has a right to apply under section 244, for an order under this Chapter.[5]

Section 241(3) provides: Where in the opinion of the Central Government there exist circumstances suggesting that

• any person concerned in the conduct and management of the affairs of a company is or has been in connection therewith guilty of fraud, misfeasance, persistent negligence or default in carrying out his obligations and functions under the law or of breach of trust;
• the business of a company is not or has not been conducted and managed by such person in accordance with sound business principles or prudent commercial practices;
•  (c) a company is or has been conducted and managed by such person in a manner which likely to cause, or has caused, serious injury or damage to the interest of the trade, industry or business to which such company pertains; or
•  the business of a company is or has been conducted and managed by such person with the intent to default its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose or in a manner prejudicial to the public interest,
• the Central Government may initiate a case against such a person and refer the same to the Tribunal with a request that the Tribunal may inquire into the case and record a decision as to whether or not such a person is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.[6]
• Clearly, the form of redressal that has been provided for under the Act is to approach the National Company Law Tribunal and then the National Company Law Appellate Tribunal.
• Arbitration, meanwhile is a form of alternative dispute resolution wherein the parties to a dispute agree to approach one or more arbitrators for the settlement of a dispute. The arbitral award given by the arbitrator will be binding on both sides. Section 8 provides:

Power to refer parties to arbitration where there is an arbitration agreement

(1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to the arbitration.

(2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.

(3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.[7]

Why Companies Prefer Arbitration Over Courts

There are many advantages to selecting Arbitration over settlement in court.

• Parties to the dispute can select their arbitrator if they both agree on it as opposed to courts where cases are assigned to judges over which parties have no control. The fact that arbitrators, just like normal people have prejudices and different approaches gives some portion of control over the case to the parties.

• Arbitration is, on the whole, a more effective and streamlined process because the set-up is simple, and the procedures are not as cumbersome as the procedures at a civil court. The motion to dismiss, for instance, is not ordinarily granted by an arbitrator, making the entire process faster too. Less tedious procedures also mean lesser litigation costs.

• Companies can control the amount of information including business secrets that they would not disclose unless they were bound to by a court order. Also, arbitral proceedings usually happen behind closed doors and can be kept confidential which is really important for companies for it protects their goodwill and reputation on which their profitability and creditworthiness hang most of the time.

• Most important of all, the arbitral award that the process arrives at is something that both sides have harmony towards, because both sides have control over much of the process and they don’t fight each other tooth and nail like they would have to in court.

Arbitrability Of Company Law Disputes

In Haryana Telecom Ltd. v. Sterlite Industries[8], the appellant challenged the decision of the Punjab and Haryana High Court which had rejected the appellant’s petition to refer the winding up petition of the company to arbitration under section 8 of the Arbitration and Conciliation Act, 1996. The Supreme Court however rejected this appeal stating that an arbitrator can only decide what they are empowered to do under section 8 of the act.

Here, winding up was already dealt with under the Companies Act, of 1956. In Sumitomo Corpn. v. CDC Financial Services (Mauritius) Ltd[9], the Supreme Court held that a matter that was before Company Law Board was pertaining to company affairs and was not arbitrable.

There were various tests laid down by courts to determine the arbitrability of disputes:

In Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd[10], the Supreme Court laid down a rule that it also held to not be inflexible: disputes relating to the right in personam or rights against a party were to be considered arbitrable while those that were relating to the right in rem or rights against the world were to be adjudicated by courts and tribunals since they were not of private nature.

In Aruna Oswal v. Pankaj Oswal[11], the court held that the jurisdiction of the National Company Law Tribunal (NCLT) in respect of oppression and mismanagement, does not extend to the determination of disputes as to succession or ownership of shares, the proper forum for which is civil court and that jurisdiction under Sections 241 to 244 must be exercised strictly in terms of provisions of Companies Act, 2013. 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.[12]

In Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya[13], the Supreme Court also clarified that bifurcation of the subject matter of dispute into personable and non-personable rights and filing for arbitration of the part of a dispute relating to Jus Personam could only be allowed if legislation unambiguously provided for it.

The Arbitration Act does not allow the bifurcation of claims i.e., if the subject matter is partially covered by arbitration there is no statutory law that allows bifurcating and referring the cases to arbitration. Therefore, in given circumstances even though the subject matter is partially covered by the arbitration agreement, disputes cannot be referred to arbitration if the clause doesn’t include oppression and mismanagement as arbitrable.

In Jugnar Processors (P) Ltd. v. Rohtas Jugalkishore Gupta[14], the Remedies Test was developed where the court held that the National Company Law Tribunal has extraordinary powers to deal with disputes relating to oppression and mismanagement, and generally other affairs of a company while the mainstay of arbitral tribunals was contractual disputes. [15]

The Totality test was laid down by the Bombay High Court in Rakesh Malhotra v. Rajinder Kumar Malhotra[16], where the court held that ‘dressed up petitions’ which mainly seek to oust the arbitration clause or to nullify it by

1. ‘Dressing up’ is an allegation to be related to the oppression and mismanagement of a company under sections 241 and 242 of the Companies Act, 2013 to be prevented from going to the arbitral tribunal
2. or deconstructing the subject matter of the suit so as to disguise that parts that are arbitrable to be related to oppression and mismanagement

have to be read as a whole including the grounds and reliefs sought, and if it is discovered that the object was to defeat the arbitration clause and that it does not pertain to matters on which only NCLT is empowered to adjudicate, then such a petition must be referred to arbitration.

The Necessary Parties test lays down that if an effective final judgment can be passed in an oppression and mismanagement dispute before the court in the absence of either party to the dispute, then such a dispute will satisfy the Necessary Parties test and cannot be referred to arbitration. This test was developed in Sidharth Gupta v. Getit Info Services (P) Ltd.[17]

Conclusion

From the above tests and the court’s changing positions, we can observe that the decisions of the courts have been very specific to the facts and circumstances of each case which is why a hard and fast rule has not been set in stone. However, we can determine that petitions relating to oppression and mismanagement claims seeking relief under sections 241 and 242 of the Companies Act, 2013 cannot ordinarily be referred to arbitration even if the parties have a prior agreement to refer disputes to an arbitrator[18].

Aside from first examining if there is an express bar under the Companies Act, 2013 making a claim non-arbitrable, one also has to see if the matter passes arbitrability tests laid down by various courts. Under section 430 of the Companies Act too, exclusive jurisdiction has been granted to NCLT and NCLAT, even at the exclusion of civil courts with regard to claims related to oppression and mismanagement, so care must also be taken to see that such claims are not dressed up claims.

Otherwise, the position of Indian Courts with regard to arbitration remains that an arbitral tribunal in India can arbitrate on all civil and commercial matters, whether arising from contractual or non-contractual obligations.

[1] (1843) 2 Hare 461, 67 ER 189

[2] [AIR 1956 SC 213], AIR1956SC213, 1956()ALT279(SC)

[3]  (2008) 3 SCC 363.

[4] https://www.legalserviceindia.com/legal/article-5368-oppression-prejudice-and-mismanagement-in-a-company-prevention-and-remedies-under-companies-act-2013.html

[5] The Companies Act, 2013

[6] The Companies Act, 2013

[7] The Arbitration and Conciliation Act,1996

[8] (1999) 5 SCC 688.

[9] (2008) 4 SCC 91

[10] (2011) 5 SCC 532

[11] (2020) 8 SCC 79

[12] https://www.scconline.com/blog/post/2021/10/08/arbitrability-of-disputes-under-sections-241-and-242-of-the-companies-act-2013/

[13] (2003) 5 SCC 531

[14] 2014 SCC OnLine CLB 160

[15] https://www.mondaq.com/india/trials-amp-appeals-amp-compensation/1074754/arbitrability-of-oppression-and-mismanagement-disputes-the-indian-position

[16] 2014 SCC OnLine Bom 1146

[17] 2016 SCC OnLine CLB 10

[18] Emgee Housing (P) Ltd. v. ELS Developers (P) Ltd

By: Madhushree N, a student at SASTRA Deemed University, Thanjavur.