[Prakhar and Jitesh are students at NALSAR University of Law.]
Disagreements among shareholders can arise in various ways, often centering on the terms outlined in a shareholders' agreement (SHA). Typically, the parties involved utilize the agreed-upon dispute resolution mechanism, usually arbitration, to address their issues. However, in some instances, these disputes may escalate into claims of corporate oppression, leading shareholders to seek redress through mandatory forums established under relevant laws. The existence of two potentially overlapping options—private arbitration and dedicated company law forums—can give rise to disputes regarding the appropriate forum for adjudicating the matter.
Recently, this issue gained attention following a dispute between BYJU'S and its investors, which came before the National Company Law Tribunal (NCLT) Bengaluru. Central to the deliberations was the question of whether an arbitral tribunal possessed the jurisdiction to adjudicate on allegations of oppression and mismanagement (O&M) within a company. The NCLT's query underscores a broader debate within India's legal landscape regarding the arbitrability of such claims.
In recent years, India has witnessed a rise in shareholder activism and an increasing preference for arbitration as a dispute resolution mechanism. Consequently, Indian courts have been confronted with the recurring dilemma of determining the arbitrability of disputes involving shareholder grievances. While some rulings have deemed these claims arbitrable, others have held them non-arbitrable. This conflicting approach has generated significant interest and raised concerns about the consistency of India's arbitration framework.
This article aims to examine the arbitrability of shareholder disputes under Indian law, analyzing developments in similar common law jurisdictions like the United Kingdom and Singapore. These developments are exemplified by the landmark judgment in Anupam Mittal v. Westbridge Ventures II Investment Holdings, which involved an Indian party. In this case, the Singapore Court of Appeal (SGCA) ruled that under Singapore law, claims of oppression are considered arbitrable, while under Indian law, they can only be resolved by the NCLT.
This article juxtaposes India's approach to handling of shareholder disputes, including those disguised as O&M claims to circumvent arbitration agreements, with that of the UK and Singapore. This comparative analysis is particularly relevant given the similarities in their legal frameworks and the prevalent practice among Indian parties to resolve disputes through arbitration administered by international arbitral institutions such as the Singapore International Arbitration Centre (SIAC) and the London Court of International Arbitration (LCIA).
India
The foundational understanding of O&M claims rests upon a comprehensive exploration of the SHA, from which these claims often emanate. In the complex network of corporate relationships, the SHA assumes a pivotal role in shaping the rights and obligations of shareholders. In Vodafone International Holdings BV v. Union of India, the Hon’ble Supreme Court (SC) underscored the significance of distinguishing the SHA from the Articles of Association (AoA), classifying the former as a private contract and the latter as a public document. Consequently, the terms enshrined within the SHA find applicability exclusively among its signatories, rendering it a unique pact that governs in personam rights.
Legal precedents have, over time, established a path to decide the arbitrability of disputes. In Booz Allen and Hamilton Inc. v. SBI Home Finance Limited, the SC distinguished between rights in rem and rights in personam, deeming the latter as amenable to arbitration because they only impact the rights of the parties that are signatories to the agreement. Subsequently, in Vidya Drolia & Others v. Durga Trading Corporation, the SC laid down a four-pronged test of arbitrability, holding that disputes where the cause of action and subject matter had in rem, and erga omnes effects, or related to inalienable sovereign functions of the state, or were implicitly or explicitly by way of statute non-arbitrable could not be referred to arbitration. However, the court clarified that subordinate in personam rights stemming from in-rem rights could be arbitrated. The SC emphasized the legislative intent behind the 2015 and 2019 amendments to the Arbitration and Conciliation Act 1996, reinforcing the arbitral tribunal's role as the "preferred first authority" in adjudicating arbitrability issues, with courts intervening only when the arbitration agreement is manifestly non-existent or invalid, or when the subject matter is demonstrably non-arbitrable, thus promoting the principle of "when in doubt, do refer [to the arbitral tribunal]." Within this legal landscape, disputes arising from SHA hold a distinct character as they only affect the signatories. Thus, the reliefs sought are within the tribunal’s purview and as such, should be referred to arbitration. This approach harmonizes with the contractual significance of SHAs, as elucidated in the Vodafone case. In effect, the SC has cemented its legal position that contractual, in personam disputes can be resolved by arbitration and are not non-arbitrable matters.
In Chatterjee Petrochem v. Haldia Petrochemicals Limited, the SC made a critical distinction regarding the nature of complaints in the context of O&M disputes. The court's ruling highlighted a clear demarcation between O&M complaints stemming from breach of contractual obligations and those stemming from violations of a shareholder's statutory rights. The court expressed the view that when a dispute is centered around a party's failure to fulfil its contractual commitments, an O&M complaint is not a suitable course of action to seek redress.
In Sidharth Gupta v. Getit Infoservices Private Limited, the Company Law Board, New Delhi (CLB) dealt with a petition lodged under Section 397–398 of the erstwhile Companies Act 1956, claiming O&M. Upon examining the petitioners’ concerns, the Court determined that the complaints stemmed from a contractual breach that included an arbitration clause. Consequently, the CLB directed the parties to pursue arbitration, emphasizing that the arbitration clause would be activated if the allegations pertained to contractual violations without any underlying malice.
Further, in Rakesh Malhotra v. Rajinder Malhotra, the Bombay High Court clarified that petitions disguising themselves as claims under the O&M provisions aimed at maliciously avoiding arbitration clauses should not be allowed to succeed. This tactic is often employed with the sole intent of impeding the operations of the company and circumventing the arbitration process. It was emphasized that parties must be directed to arbitration when a valid arbitration agreement exists. In 2021, the National Company Law Appellate Tribunal in Macquarie SBI Infrastructure Investments Private Limited v. K Sadananda Shetty recognized that the respondents had filed a dressed-up petition under Sections 241 and 242 of the Companies Act 2013, seeking contractual reliefs. The tribunal noted that the powers of the NCLT under Sections 241 and 242 were limited to the affairs of the company and did not extend to the enforcement of contractual rights, which fall within the domain of the arbitrator. Furthermore, the tribunal observed that a party approaching the NCLT seeking relief under O&M provisions did not waive its rights to arbitrate contractual issues arising from an agreement. Even if such rights were waived, they would still need to be adjudicated by the arbitral tribunal in accordance with the principle of kompetenz-kompetenz.
The United Kingdom
The arbitrability of O&M disputes in the United Kingdom has its basis in the UK Companies Act 1980. Similar to India, the UK Arbitration Act 1996 lacks specific criteria to determine disputes unsuitable for arbitration, leaving such decisions to be made on a case-by-case basis by the courts.
In the UK, courts have generally adopted a pro-arbitration approach when dealing with O&M cases. In the landmark case of Fulham Football Club (1987) Ltd. v. Richards (Fulham), the Court of Appeal ruled that 'unfair prejudice' cases can be referred to arbitration, thus upholding the principle of contractual freedom and party autonomy. The Court held that neither the Arbitration Act 1996 nor the Companies Act 2006 explicitly excluded unfair prejudice disputes from arbitration. While specific remedies with broader ramifications were reserved for the court (such as winding-up), this did not render the entire subject matter non-arbitrable. In cases where a conflict arises among the members of a company or between shareholders and the board, specifically concerning alleged violations of the company's AOA or a SHA, such disputes are considered fundamentally contractual and internal. This characterization denotes that these disputes typically do not directly involve the rights of third parties or infringe upon statutory safeguards established to protect third-party interests. Consequently, such disputes are generally regarded as arbitrable.
In 2020, Foxton J, in Riverrock Securities Ltd v. International Bank of St Petersburg, echoed the precedent set by Fulham, affirming that when disputes involve contractual rights and do not implicate third-party interests, arbitration remains a viable avenue for resolving corporate matters, including those related to corporate insolvency. This endorsement indicates a consistent judicial stance that underscores the arbitrability of such disputes as long as they primarily pertain to contractual issues and do not substantially involve external parties' rights.
Singapore
Similar to India, the legal framework governing claims of O&M in Singapore originates from the UK Companies Act 1948. Over the years, Singapore has developed robust jurisprudence that addresses various aspects of company law, including the arbitrability of O&M claims.
In 2015, the SGCA made a significant ruling on the arbitrability of O&M claims in the case of Tomolugen Holdings Ltd and another v. Silica Investors Ltd and Other Appeals. Despite facing certain procedural complexities, the SGCA held that claims related to minority oppression or unfairly prejudicial conduct were deemed arbitrable, even if the arbitral tribunal lacked the authority to grant the full range of remedies. The court firmly disagreed with the reasoning that the arbitrability of the relief sought could impact the arbitrability of the actual claim. Recognizing that disputes involving common parties and issues may need resolution before different fora due to only a portion of the dispute falling under the applicable arbitration clause, the court acknowledged the inherent procedural complexities. However, these procedural difficulties did not meet the statutory criteria for non-arbitrability. Ultimately, the SGCA's ruling clarified that despite facing challenges in seeking specific remedies through arbitration, the core claims of minority oppression and unfairly prejudicial conduct remained within the realm of arbitrability.
In 2017, the SGCA in L Capital Jones Ltd and Another v. Maniach Pte Ltd reinforced the position that minority oppression claims are arbitrable, but with a caveat that there might be minority oppression claims involving specific features (i.e., features other than being a minority oppression claim) such as abuse of the judicial process that raise public policy concerns and thus render those claims not arbitrable. Thus, courts in Singapore are likely to permit claims of minority oppression to be resolved by arbitration unless the facts raise particular public policy concerns that are better resolved in a public forum.
Conclusion
These judgments indicate that arbitration in India can be initiated while dealing with shareholder disputes if it is found that the origin of the dispute lies in the agreement, the agreement provides for the relief being sought, and the referral to arbitration does not impact the rights of third parties. This position also finds resonance in the UK and Singapore. Further, petitions alleging O&M and seeking to oust the jurisdiction of the arbitral tribunal should be closely scrutinized to ensure that they are not 'dressed up' with the intention of circumventing an arbitration agreement.
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