Arbitrability Of Oppression And Mismanagement Disputes Under Companies Act, 2013

Ankur Mittal, Additional Advocate General Haryana
Punjab & Haryana High Court, Chandigarh
Email Id :

Date : 14/07/2021 Location : House No. 894, Top Floor, Sector 38-A, Chandigarh
📱 +91 8437999999

Arbitrability Of Oppression And Mismanagement Disputes Under Companies Act, 2013

Arbitrability means whether a matter can or cannot be settled through arbitration and whether certain type of disputes only falls under the jurisdiction of a tribunal or the state courts. The Model Law does not specifically elucidate as to which disputes are arbitrable in nature and has left the same to the existing state laws to give specific directions. Though a large number of commercial contracts have an arbitration clause for ease of dispute resolution but this does not mean that all disputes are arbitrable in nature. In this article the arbitrability of disputes concerning oppression and mismanagement in companies has been discussed at length. We will discuss the meaning, significance and scope of arbitrability in a form of dispute that more often than not involves a third party in the form of shareholders who might not be a party of the arbitration agreement.

Oppression and mismanagement have been covered under Sections 241 to 246 of the Companies Act, 2013 (sections 397 and 398 of the Companies Act, 1956 were analogous to sections 241 and 242 of the Companies Act, 2013) which gives powers to the shareholders of any company especially minority share holders to file a petition before NCLT addressing Oppression and Mismanagement. Section 241(a) defines Oppression as "the affairs of the company have been or are being conducted in a manner prejudicial to 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." Section 241(b) defines Mismanagement as "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."

Sections 241 and 242 of the Companies Act, 2013 provides that National Company Law Tribunal (NCLT) which was earlier known as Company Law Board under the Companies Act, 1956; is the governing authority for all disputes that are related to oppression and mismanagement. NCLT has the power to provide a wide range of reliefs in these types of cases. But it has to be noted that nowhere it has been written that such cases cannot go for arbitration. If an arbitration clause is present in an agreement between the concerned parties, then on the face of it the case can be referred for arbitration. This position is supported by section 244 of the Companies Act, 2013 and sections 8 and 45 of the Arbitration and Conciliation Act, 1996. On the other hand, it can be reasoned that two statutory bodies cannot hear the same dispute and that NCLT has been vested with the statutory authority under the Companies Act, 2013.

Section 8 of the Arbitration and Conciliation Act, 1996 states that "(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 to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists."

It is clearly stated that a dispute need not be arbitrable as a prerequisite to be considered for arbitration and due to this reason, there has been much debate about the arbitrability dispute concerning oppression and mismanagement in a company. General rules about the `arbitrability' of a dispute have been laid down in various judgments but authorities generally tends to refer to Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532 which lays down the distinction between the arbitrability of rights in personam[1*] and rights in rem[2*]. The court, in this case, had relied on the case of Haryana Telecom v. Sterlite, 1990 (97) CompCas 675 (P&H) and states that in case of winding up of a company third party rights are involved and thus the same cannot go for arbitration. It has been deemed that those matters concerning the former are arbitrable in nature while the latter is not arbitrable.

[1* Right in personam means the right against a specific person.]

[2* Right in rem means a right against an item of property.]

On the face of it, oppression and mismanagement matters appear to be "right in personam" as they are filed by the oppressed shareholders of a company and such matters also arise from activities that are against public interest which cannot be waived by contractual provisions. Thus, such matters are usually sent to NCLT and not an arbitral tribunal.

The position about the arbitrability of such disputes was finally settled in the case of Rakesh Malhotra v. Rajinder Malhotra, 2014 SCC Online Bom 1146. In this case, the Bombay High Court held that considering the special powers that have been made available to the Company Law Board (now known as NCLT) under section 402 of the Companies Act, 1956 (now available under section 241 under Companies Act, 2013) have not been provided to an arbitral tribunal. Thus, it was held that disputes pertaining to such matters as mentioned under sections 241 and 242 of the Companies Act, 2013 cannot be referred for arbitration. This judgment has been instrumental in providing much-needed clarity in dealing with these matters and has provided general principles for the judiciary to deal with them.

The Tribunal has the right to adjudicate certain kinds of proceedings as a matter of public policy and due to this reason cases relating the right in rem cannot be referred for arbitration as they also affect third-party rights. However, if the disputes pertaining to the right in personam then, the case can be referred for arbitration, especially if the agreement between both the parties has an arbitration clause. Due to these principles, the courts have adopted a fact-based approach in oppression and mismanagement disputes to decide whether a particular case can be referred for arbitration or not. In these cases, the main issue is the commonality of the parties and whether any third party is involved. This issued in regard to a civil suit has been settled in the landmark judgement of Sukanya Holdings (p) Ltd. v. Jayesh H. Pandya, (2003) 5 SCC 531 by the Supreme Court. The court had observed that if a few involved parties were bound by an arbitral agreement and other were not, then the case cannot be referred for arbitration.

The Bombay High Court in the case of Rakesh Malhotra clubbed all these propositions and held that:

"It must therefore follow that where a petition under Chapter VI of the Companies Act, 1956 seeks reliefs some of which are in the nature of reliefs in rem and others that are in personam, then it is not possible or permissible to sever one from the other and disassemble such a petition.... Haryana Telecom, to my mind, though in a petition for winding up, and clearly, therefore, a matter in rem, states as a proposition that no agreement between the parties can vest an arbitral panel with the power of winding up. Similarly, no arbitration agreement can vest an arbitral tribunal with the powers to grant the kind of reliefs against oppression and mismanagement that the CLB might."

Although, disputes under sections 241 and 242 are not arbitrable but that does not bar the court from accepting an application for the same under sections 8 and 45 of the Arbitration and Conciliation Act, 1996. Courts have time and again warned through judgments against the implication of unnecessary parties in order to avoid arbitration. It has been vehemently established that in such cases the application shall be liable to be dismissed and the case could be referred for arbitration. The courts have held that if clever drafting has been used to hide away the true substance of the case and it is the duty of the court the unveil the true matter at hand and take appropriate action.

In this regard, the court in Rakesh Malhotra held:

"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."

Under this sole exception to the rule, the applicant has to establish that the petition which has been filed under sections 241 and 242 is `mala fide' `vexatious' or `dressed up' with the objective of circumventing the arbitration clause. But the issue here is that the court has not given any proper definition of what will be considered as mala fide, vexatious or dressing up and would require a clear interpretation.

Thus, the Rakesh Malhotra judgment has per se given us with the general rules that shall be used in these kinds of disputes. It has also set it out that these matters shall not be arbitrable in nature except for the exception that has been mentioned above. But saying that these disputes are not at all arbitrable shall be an overstatement. If disputes of such nature arise due to breach of the shareholders agreement or a joint venture agreement and a specific relief has not been sought under section 242, then the case can go for arbitration if they have an arbitration agreement in existence. But we have to keep in mind other provisions of the Companies Act, 2013 that has a direct impact on the situation.

Even section 430 of the Companies Act, 2013, gives exclusive jurisdiction to NCLT/NCLAT (National Company Law Appellate Tribunal) to the exclusion of the civil courts to adjudicate any matters that pertain to oppression and mismanagement claims under the act. NCLT has extraordinary jurisdiction to issue orders that concern to the regulation of the company's internal affairs, any change in management, proper function of the directors etc., whereas the arbitral tribunal can adjudicate on limited terms of any such contract[3*]. Under the Arbitration Act, 1996 there is no provision that clearly defines the powers of an arbitral tribunal. But Indian courts have time and again given powers to the arbitral tribunal to adjudicate in various civil and commercial matters whether they were contractual or non-contractual in nature.

[3* Jugnar Processors (P) Ltd. v. Rohtas Jugalkishore Gupta, 2014 SCC Online CLB 160.]

But it can be clearly said that circumstances under which these disputes can go for arbitration are very specific in nature and have to be read with great depth and understanding with the prevailing principles that have been established by the courts.

© Chawla Publications (P) Ltd.